-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, U6d6mqwCewEJL4b30tPPc+QxpiHsppVJEhvMPWoMEDjjbiWD2lc1zhvNIaWG/6M/ IO2Fg9stF28T8dD/pVWsSg== 0000914317-04-001397.txt : 20040330 0000914317-04-001397.hdr.sgml : 20040330 20040330131238 ACCESSION NUMBER: 0000914317-04-001397 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20031231 FILED AS OF DATE: 20040330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRSTFED BANCORP INC CENTRAL INDEX KEY: 0000876947 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 631048648 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-19609 FILM NUMBER: 04699426 BUSINESS ADDRESS: STREET 1: 1630 4TH AVE N CITY: BESSEMER STATE: AL ZIP: 35020 BUSINESS PHONE: 2054288472 MAIL ADDRESS: STREET 1: 1630 4TH AVENUE N CITY: BESSEMER STATE: AL ZIP: 35020 10KSB 1 firstfed10ksb59216.txt SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB (Mark One) |X| Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 2003. OR |_| Transition Report under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Transition Period from ____________ To ____________. Commission File Number: 0-19609 FirstFed Bancorp, Inc. (Exact name of small business issuer in its charter) Delaware 63-1048648 (State or other jurisdiction of incorporation (I.R.S. Employer or organization) identification No.) 1630 Fourth Avenue North Bessemer, Alabama 35020 (Address of principal executive office) Zip Code Registrant's telephone number, including area code: (205) 428-8472 Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value (Title of Class) Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES |X| N0 |_| Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-KSB or any amendment to this Form 10-KSB |X|. State issuer's revenues for its most recent fiscal year $12,897,000. The aggregate market value of the voting stock held by non-affiliates of the registrant (i.e., persons other than directors, executive officers and 10% stockholders of the registrant), based on the closing sales price of the registrant's common stock as quoted on the NASDAQ SmallCap Market March 23, 2004, was $11,404,024. As of March 23, 2004, there were issued and outstanding 2,383,144 shares of the registrant's common stock. DOCUMENTS INCORPORATED BY REFERENCE (1) Portions of the Annual Report to Stockholders for the fiscal year ended December 31, 2003, are incorporated by reference into Parts I and II of this Form 10-KSB. (2) Portions of the Proxy Statement for the December 31, 2003, Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-KSB. TABLE OF CONTENTS
Page ---- PART I. ITEM I. Description of Business ..................................................... 1 ITEM 2. Description of Property ..................................................... 18 ITEM 3. Legal Proceedings ........................................................... 19 ITEM 4. Submission of Matters to a Vote of Security Holders ......................... 19 PART II. ITEM 5. Market for Common Equity and Related Stockholder Matters .................... 19 ITEM 6. Management's Discussion and Analysis or Plan of Operation ................... 20 ITEM 7. Financial Statements ........................................................ 20 ITEM 8. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure ....................................... 20 ITEM 8A. Controls and Procedures ..................................................... 20 PART III. ITEM 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act ......................... 20 ITEM 10. Executive Compensation ...................................................... 21 ITEM 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ....................................................... 21 ITEM 12. Certain Relationships and Related Transactions .............................. 21 ITEM 13. Exhibits and Reports on Form 8-K ............................................ 21 ITEM 14. Principal Accountant Fees and Services ...................................... 22
i. PART I ITEM 1. DESCRIPTION OF BUSINESS: THE COMPANY FirstFed Bancorp, Inc. (the "Company"), a Delaware corporation, is a bank holding company that has registered as a financial holding company. As of December 31, 2002, the Company served as the holding company for First State Corporation ("FSC"). FSC is the sole shareholder for First Financial Bank ("First Financial" or the "Bank"). In the prior year, the Company was the holding company and sole shareholder of First Federal Savings Bank ("First Federal") and FSC. FSC was the sole shareholder of First State Bank of Bibb County ("First State"). During 2002, First Federal and First State were merged and the name changed to First Financial. The Company's assets consist primarily of its subsidiary investment and liquid investments. It engages in no significant independent activity. The Company had total assets of $194,211,000, total deposits of $151,109,000 and stockholders' equity of $18,552,000 at December 31, 2003. The Company's earnings were primarily dependent upon the net interest income of First Financial, which is the difference between the income derived from interest-earning assets, such as loans and securities, and the interest expense incurred on interest-bearing liabilities, primarily deposit accounts. Net interest income is affected by (i) the difference between rates of interest earned on interest-earning assets and rates of interest paid on its interest-bearing liabilities ("interest rate spread") and (ii) the relative amounts of interest-earning assets and interest-bearing liabilities. When interest-earning assets approximate or exceed interest-bearing liabilities, any positive interest rate spread will generate net interest income. The Company's executive office is located at the main office at 1630 Fourth Avenue North, Bessemer, Alabama 35020. The telephone number is (205) 428-8472. FIRST FINANCIAL BANK As of December 31, 2003, the Bank's principal business consisted of attracting deposits from the general public and investing those deposits in one-to-four-family residential mortgage loans, commercial mortgage loans, commercial loans and consumer loans. The Bank is a member of the Federal Home Loan Bank ("FHLB") System and its deposit accounts all insured by the Federal Deposit Insurance Corporation ("FDIC") up to the maximum amount allowable by the FDIC. The Bank was subject to regulation, examination and supervision by the FDIC and the State Banking Department of the State of Alabama (the "Banking Department"). The Bank conducts business from eight locations in Bibb, Jefferson, Shelby and Tuscaloosa Counties, Alabama, consisting of its home office in Bessemer and seven other branches, one each in Centreville, Hoover, Hueytown, Pelham, Vance, West Blocton and Woodstock. Each branch is a full-service facility. CRITICAL ACCOUNTING POLICIES The accounting principles followed by the Company and the methods of applying these principles conform with accounting principles generally accepted in the United States and with general practices followed by the banking industry. Critical accounting policies relate to securities, loans, allowance for loan losses, stock-based compensation and intangibles. These policies, which significantly affect the determination of financial position, results of operations and cash flows, are summarized in Note 1, "Summary of Business and Significant Accounting Policies", in the Notes to Consolidated Financial Statements in the Annual Report to Stockholders (Exhibit 13). LIQUIDITY Liquidity refers to the ability of the Company to meet its cash flow requirements in the normal course of business, including loan commitments, deposit withdrawals, liability maturities and ensuring that the Company is in a position to take advantage of investment opportunities in a timely and cost-efficient manner. Management monitors the Company's liquidity position, and reports to the Board of Directors monthly. The Company may achieve its desired liquidity objectives through management of assets and liabilities and through funds provided by operations. Funds invested in short-term marketable instruments, the continuous maturing of other interest-earning assets, the possible sale of available- for-sale securities and the ability to securitize certain types of loans provide sources of liquidity from an asset perspective. The liability base provides sources of liquidity through deposits. The Company also has accessibility to market sources of funds such as FHLB advances, purchase of Fed Funds and correspondent bank borrowings. The 1 Consolidated Statements of Cash Flows, included in the Annual Report, provides an analysis of cash from operating, investing, and financing activities for each of the two years in the period ended December 31, 2003. Sources of liquidity discussed in Notes to Consolidated Financial Statements in the Annual Report include: Note 2 - "Maturity of Securities Portfolio" and Note 8 - "Maturity Distribution of Deposits". Also, see "Loan Maturity" and "Deposits, Borrowings and Other Sources of Funds" herein for additional sources of liquidity. No trends in the sources or uses of cash by the Company are expected to have a significant impact on the Company's liquidity position. The Company believes that the level of liquidity is sufficient to meet current and future liquidity requirements. KEY OPERATING DATA The following table summarizes certain key operating ratios for the years ended December 31, 2003 and 2002. 2003 2002 ---- ----- Return on average assets .21% .11% Return on average equity 2.15% 1.08% Average equity to average assets 9.94% 10.46% Dividend payout ratio 206% 389% 2 AVERAGE BALANCES, YIELDS EARNED AND RATES PAID The following tables set forth certain information relating to the Company's consolidated statements of financial condition for the years ended December 31, 2003 and 2002, and reflects the average yield on assets and average cost of liabilities for the periods indicated. Average balances are derived subject to certain adjustments from daily balances. The average balances of loans include non-accrual loans. For further discussion, see "Management's Discussion and Analysis" in the Company's December 31, 2003, Annual Report to Stockholders (the "Annual Report"), Exhibit 13 hereto.
2003 2002 --------------------- --------------------- Average Average Balance Interest Balance Interest -------- -------- -------- -------- (In thousands) Interest-earning assets: Loans $123,023 $ 7,473 $106,603 $ 8,429 Securities 27,940 1,373 33,280 1,916 Other interest-earning assets 18,243 159 27,519 320 -------- -------- -------- -------- Total interest-earning assets 169,206 9,005 167,402 10,665 -------- -------- Non-interest-earning assets 18,611 14,585 -------- -------- Total assets $187,817 $181,987 ======== ======== Interest-bearing liabilities: Deposits $148,092 $ 3,137 $145,094 $ 4,021 Borrowings 18,285 900 17,504 895 -------- -------- -------- -------- Total interest-bearing liabilities 166,377 4,037 162,598 4,916 Non-interest bearing liabilities 2,694 808 -------- -------- -------- -------- $ 4,968 $ 5,749 ======== ======== Total liabilities 169,071 163,406 Stockholders' equity 18,746 18,581 -------- -------- Total liabilities and stockholders' equity $187,817 $181,987 ======== ========
2003 2002 ---- ---- Yield on: Loans 6.07% 7.91% Securities (1) 4.92 5.76 Other interest-earning assets 0.87 1.16 All interest-earning assets 5.32 6.37 Rate paid on: Deposits 2.12 2.77 Borrowings 4.92 5.11 All interest-bearing liabilities 2.43 3.02 Interest rate spread (2) 2.89% 3.35% ==== ==== Net yield (3) 2.94% 3.43% ==== ==== (1) Yields on tax-exempt obligations have been computed on a full federal tax-exempt basis using an income tax rate of 34% for 2003 and 2002. (2) Interest rate spread represents the difference between the average yield on total interest-earning assets and the average rate of total interest-bearing liabilities. (3) Net yield represents net interest income as a percentage of average interest-earning assets. 3 RATE/VOLUME ANALYSIS The following table describes the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have affected the Company's interest income and interest expense during the periods indicated. Information is provided in each category with respect to (i) changes attributable to changes in volume (changes in volume multiplied by prior rate), (ii) changes attributable to changes in rate (changes in rate multiplied by prior volume), and (iii) the net change. The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate. Net interest income decreased $781,000 for the year ended December 31, 2003, compared to the year ended December 31, 2002.
Year Ended Year Ended December 31, 2003 December 31, 2002 Versus Versus Year Ended Year Ended December 31, 2002 December 31, 2001 --------------------------------- --------------------------------- Volume Rate Net Volume Rate Net ------- ------- ------- ------- ------- ------- (In thousands) Increase (decrease) in interest earned on: Loans $ 1,874 $(2,830) $ (956) $ (906) $(1,259) $(2,165) Securities (284) (259) (543) 56 (143) (87) Other interest-earning assets (92) (69) (161) 692 (1,044) (352) ------- ------- ------- ------- ------- ------- Total 1,498 (3,158) (1,660) (158) (2,446) (2,604) ------- ------- ------- ------- ------- ------- Decrease (increase) in interest paid on: Deposits 54 (938) (884) 10 (1,975) (1,965) Other borrowings 8 (3) 5 40 (12) 28 ------- ------- ------- ------- ------- ------- Total 62 (941) (879) 50 (1,987) (1,937) ------- ------- ------- ------- ------- ------- Net (decrease) increase in net interest income $ 1,436 $(2,217) $ (781) $ (208) $ (459) $ (667) ======= ======= ======= ======= ======= =======
4 ASSET/LIABILITY MANAGEMENT The Company is subject to interest rate risk to the degree that its interest-bearing liabilities with short and medium term maturities mature or reprice more rapidly, or on a different basis, than its interest-earning assets. The Company has employed various strategies intended to minimize the adverse effect of interest rate risk on future operations by providing a better match between the interest rate sensitivity of assets and liabilities. The strategies are intended to stabilize net interest income for the long-term by protecting the interest rate spread against fluctuations in market interest rates. Such strategies include the origination for portfolio of adjustable-rate mortgage loans secured by one-to-four-family residences and commercial mortgage and, to a lesser extent, the origination of consumer and other loans with greater interest rate sensitivities than long-term fixed-rate residential mortgage loans. Other strategies include maintaining a significant portion of liquid assets, such as cash and interest-bearing deposits in other institutions, and seeking to maintain a stable core deposit base with a relatively high percentage of low cost deposits. The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are "interest rate sensitive" and by monitoring an institution's interest rate sensitivity "gap". An asset or liability is said to be interest rate sensitive within a specific period if it will mature or reprice within that period. The interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets maturing or repricing within a specific time period and the amount of interest-bearing liabilities maturing or repricing within that time period. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities, and is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. Generally, during a period of rising interest rates, a negative gap would adversely affect net interest income while a positive gap would result in an increase in net interest income. Conversely, during a period of falling interest rates, a negative gap would result in an increase in net interest income and a positive gap would negatively affect net interest income. At December 31, 2003, the cumulative one-year gap is slightly negative using the indicated assumptions. Management believes that the Company's strong capital position is sufficient to protect against the negative effects of interest rate changes on net income. Certain shortcomings are inherent in any method of any gap analysis, including that presented in the following table. For example, the analysis does not consider prepayments of loans or early withdrawals of certificates of deposits. In addition, the method used assumes that each savings and transaction accounts will be withdrawn in favor of an account with a more favorable interest rate within 90 days. This assumption maximizes the amount of liabilities repricing during such period. Also, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Moreover, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. A change in interest rates may cause assets and liabilities to reprice or mature on a basis significantly different from their contractual terms. Historically, the Company has not experienced the level of volatility in net interest income indicated by the cumulative one-year gap ratio. The primary reason for this is that a relatively large base of deposit products do not reprice on a contractual basis. These deposit products are primarily traditional savings accounts and transaction interest-bearing accounts. Balances for the accounts are reported in the "within 90 days" repricing category and comprise 30.6% of total interest-bearing liabilities. The rates paid on these accounts are typically sensitive to changes in market interest rates only under certain conditions, such as market interest rates falling to historically low levels. 5 Interest Rate Sensitivity Analysis The following table sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at December 31, 2003, which are expected to reprice or mature in each of the future time periods shown. The amount of assets and liabilities shown which reprice or mature during a particular period was determined in accordance with the contractual terms of the asset or the liability, except as stated below. Loans that have adjustable interest rates are shown as being due in the period during which the interest rates are next subject to change. No prepayment assumptions have been applied to fixed-rate loans. Certificates of deposit are shown as being due in the period of maturity. Passbook and transaction accounts are shown as repricing within 90 days. The assumption that assets and liabilities will reprice or mature in accordance with their contractual terms should not be considered indicative of the actual results that may be experienced by the Bank. The Company's outside data processor is not providing the maturity and repricing of loans less than 90 days. The cost for manually determining the information exceeds the benefits received.
At December 31, 2003 --------------------------------------------------------------------- Within 91 To 181 Days 1 Year 3 Years 90 Days 180 Days To 1 Year To 3 Years To 5 Years --------- --------- --------- ---------- ---------- (Dollars in thousands) Interest-earning assets: Loans receivable (2) $ 30,943 $ 22,259 $ 40,437 $ 16,011 $ 10,238 Securities (1) -- -- -- 19,433 6,771 Cash investments 4,669 -- -- -- -- --------- --------- --------- --------- --------- Total interest-earning assets 35,612 22,259 40,437 35,444 17,009 --------- --------- --------- --------- --------- Interest-bearing liabilities: Savings accounts (3) 25,519 -- -- -- -- Transaction accounts (3) 27,990 -- -- -- -- Certificate accounts 13,084 15,531 15,500 32,642 12,982 Borrowings 5,700 1,080 -- 17,000 -- --------- --------- --------- --------- --------- Total interest-bearing liabilities 72,293 16,611 15,500 49,642 12,982 --------- --------- --------- --------- --------- Interest sensitivity gap per period $ (36,681) $ 5,648 $ 24,937 $ (14,198) $ 4,027 ========= ========= ========= ========= ========= Cumulative interest sensitivity gap $ (36,681) $ (31,033) $ (6,096) $ (20,294) $ (16,267) ========= ========= ========= ========= ========= Percentage of cumulative gap to total assets (18.89)% (15.98)% (3.14)% (10.45)% (8.38)% Cumulative ratio of interest-sensitive assets to interest-sensitive liabilities 49.26% 65.09% 94.16% 86.83% 90.26% At December 31, 2003 ------------------------------------------------------- 5 Years 10 Years Over To 10 Years To 20 Years 20 Years Total ----------- ----------- -------- --------- (Dollars in thousands) Interest-earning assets: Loans receivable (2) $ 9,274 $ 4,965 $ 3,621 $ 137,748 Securities (1) 88 494 2,609 29,395 Cash investments -- -- -- 4,669 --------- --------- --------- --------- Total interest-earning assets 9,362 5,459 6,230 171,812 --------- --------- --------- --------- Interest-bearing liabilities: Savings accounts (3) -- -- -- 25,519 Transaction accounts (3) -- -- 7,854 35,844 Certificate accounts 7 -- -- 89,746 Borrowings -- -- -- 23,780 --------- --------- --------- --------- Total interest-bearing liabilities 7 -- 7,854 174,889 --------- --------- --------- --------- Interest sensitivity gap per period $ 9,355 $ 5,459 $ (1,624) $ (3,077) ========= ========= ========= ========= Cumulative interest sensitivity gap $ (6,912) $ (1,453) $ (3,077) $ (3,077) ========= ========= ========= ========= Percentage of cumulative gap to total assets (3.56)% (0.75)% (1.58)% (1.58)% Cumulative ratio of interest-sensitive assets to interest-sensitive liabilities 95.86% 99.13% 98.24% 98.24%
(1) Includes $29,395 in securities available-for-sale; such securities are reflected in the above table based on their contractual maturity. (2) Includes $1,033 in loans held for sale; such loans are reflected in the above table in the within 90 days category. (3) Assumes that each savings and transaction account will be withdrawn in favor of an account with a more favorable interest rate within 90 days. This assumption maximizes the amount of liabilities repricing during such period. Normally, the rates paid on these accounts are not particularly sensitive to changes in market interest rates. If these amounts were spread based on expected repricing characteristics, the cumulative gap would have been significantly reduced. The noninterest-bearing checking accounts were included in the over 20 years category. 6 LENDING ACTIVITIES General The Company's loan portfolio is comprised primarily of first mortgage loans secured by one-to-four family residences and commercial property, a majority of which are adjustable rate. The Company originates loans on real estate located in its primary lending areas in West Jefferson, Northern Shelby and Bibb Counties of Alabama, which include Bessemer, Pelham, Hueytown, Hoover, West Blocton, Centreville, and the western suburbs of Birmingham. The Company has not purchased servicing rights. The Company routinely sells fixed rate loans in the secondary market with servicing released. During 2002, the Company sold approximately $10 million of mortgage loans to FNMA where servicing was retained. Mortgage servicing rights are capitalized based on relative fair value. Residential Lending - One-to-Four Family The Company offers various adjustable rate one-to-four family residential loan products ("ARMs"). ARMs generally are subject to a limitation of 2% per annum adjustment for interest rate increases and decreases, with a lifetime cap of 6% on increases. These limits, based on the initial rate, may reduce the interest rate sensitivity of such loans during periods of changing interest rates. Interest rates and origination fees on ARMs are priced to provide a profit margin and not necessarily to be competitive in the local market. One-to-four family residential ARMs do not provide for negative amortization. The Company generally makes one-to-four family residential mortgage loans in amounts not to exceed 80% of the appraised value or sale price, whichever is less, of the property securing the loan, or up to 95% if the amount in excess of 80% of the appraised value is secured by private mortgage insurance, or 80% to 85% with an increased interest rate. The Company usually charges an origination fee of 1.00% on one-to-four family residential mortgage loans. The Company's loan policy requires approval by a loan committee or the Board of Directors for loans over specified amounts. The Board of Directors is furnished with an analysis of the respective monthly loan activity. In addition to ARM lending, the Company may originate fixed rate one-to-four family residential loans. However, at this time, almost all fixed rate loans are being sold into the secondary market, servicing released. Investor relationships have been established with several banks and mortgage companies. In addition, the Company is approved by the Federal Home Loan Mortgage Corporation (FHLMC) and the Federal National Mortgage Association (FNMA) to sell and service loans. These outlets allow more diversified products and enhance the management of interest rate risk. The Company applies the required underwriting procedures in making these fixed rate mortgage loans. Commercial Real Estate Lending Loans secured by commercial real estate totaled approximately $41.9 million, or 30.8% of the total loan portfolio, at December 31, 2003. Commercial real estate loans are generally originated in amounts up to 80% of the appraised value of the property. Such appraised value is determined by an independent appraiser previously approved by the Company. Commercial real estate loans are permanent loans secured by improved property such as office buildings, retail stores, warehouses, churches, hotels/motels, and other non-residential buildings. Of the commercial real estate loans outstanding at December 31, 2003, most are located within 100 miles of the Company's office locations and were made to local customers. In addition, borrowers generally must personally guarantee loans secured by commercial real estate. Commercial real estate loans generally have 10 to 20 year terms and are made at rates based upon market rates for the type of property. Such loans amortize over the life of the loan. Commercial real estate loans are usually made at adjustable rates. Loans secured by commercial real estate properties are generally larger and involve a greater degree of risk than residential mortgage loans. Because payments on loans secured by commercial real estate properties are often dependent on successful operation or management of the properties, repayment of such loans may be subject to a greater extent to adverse conditions in the real estate market or the economy. The Company seeks to minimize these risks by lending to established customers and generally restricting such loans to its primary market area. 7 Construction Lending The Company has several construction loan programs. At December 31, 2003, the Company had $27.3 million in construction loans or 20.0% of the loan portfolio. Such loans are primarily classified as one-to-four family residential loans or commercial real estate loans depending upon the character of the property used as collateral. Of such amount, $14.6 million was undisbursed at December 31, 2003, and consisted primarily of loans to individuals for construction of residential properties. The Company presently charges adjustable interest rates on construction and construction- permanent loans. Construction and construction-permanent loans may be made for up to 80% of the anticipated value of the property upon completion. Funds are disbursed based upon percentage of completion as verified by an on-site inspection. Consumer Lending As a community-oriented lender, the Company offers certain secured and unsecured consumer loans, including primarily loans secured by deposits, automobile loans, mobile home loans, signature loans and other secured and unsecured loans. Consumer loans totaled $7.6 million or 5.6% of the total loan portfolio at December 31, 2003. Consumer loans, while generally having higher yields than residential mortgage loans, involve a higher credit risk. Home Equity Lending Home equity loans may be made not to exceed 90% of the first and second combined mortgage loan to value. These loans are credit lines with a maximum loan term of 10 years. The interest rate on these lines of credit adjusts monthly at a rate based on prime. At December 31, 2003, the outstanding home equity loan balance was $7.8 million. Commercial Lending The Company originates commercial loans and commercial lines of credit. The commercial loans are based on serving market needs while limiting risk to reasonable standards and lending only to strong, well established businesses in the Company's market areas. Commercial loans are adjustable rate loans and are generally, secured by equipment, accounts receivable and inventory. Commercial loans totaled approximately $7.5 million or 5.5% of the total loan portfolio at December 31, 2003. 8 Analysis of Loan Portfolio The following table sets forth the composition of the Company's mortgage and other loan portfolios in dollar amounts and in percentages at the dates indicated. At December 31, 2003, the Company had no concentrations of loans exceeding 10% of total loans that are not disclosed below.
December 31, December 31, 2003 2002 -------------------- -------------------- Percent Percent of of Amount Total Amount Total -------- ------- -------- ------- (Dollars in thousands) Mortgage Loans: One-to-four family residential $ 53,569 39.36% $ 47,903 45.92% Construction 27,277 20.04 24.542 16.70 Commercial real estate 41,854 30.75 17,415 23.53 -------- ------ -------- ------ Total mortgage loans 122,700 90.15 89,860 86.15 -------- ------ -------- ------ Consumer loans: Savings accounts 220 .16 497 .47 Other 7,343 5.40 7,674 7.36 -------- ------ -------- ------ Total consumer loans 7,563 5.56 8,171 7.83 -------- ------ -------- ------ Commercial loans 7,485 5.50 7,406 7.10 -------- ------ -------- ------ Total loans receivable 137,748 101.21 105,437 101.08 -------- ------ -------- ------ Less: Allowance for loan losses 1,397 1.03 1,059 1.02 Net deferred loan fees 252 .18 68 .06 -------- ------ -------- ------ 1,649 1.21 1,127 1.08 -------- ------ -------- ------ Loans receivable, net $136,099 100.00% $104,310 100.00% ======== ====== ======== ======
9 Loan Maturity The following table shows the maturity, without regard to repricing dates, of the loan portfolio at December 31, 2003, based upon contractual maturity. See page 6, "Interest Rate Sensitivity Analysis", for an analysis of loans based on expected repricing or maturity.
December 31, 2003 ---------------------------------------------------------------------- One-to-Four Family Residential and Commercial Construction Real Estate Consumer Commercial Loans Loans Loans Loans Total ------------ ---------- -------- ---------- -------- (In thousands) Amounts Due: One year or less $ 20,253 $ 3,087 $ 357 $ 5,830 $ 29,527 One year through 5 years 10,362 5,800 6,705 1,473 24,340 After 5 years 50,231 32,967 501 182 83,881 -------- -------- -------- -------- -------- $ 80,846 $ 41,854 $ 7,563 $ 7,485 137,748 ======== ======== ======== ======== Less: Allowance for loan losses 1,397 Net deferred loan fees 252 -------- Loans receivable, net $136,099 ========
Scheduled contractual principal repayments of loans do not necessarily reflect the actual life of such assets. The average life of long-term loans is substantially less than their contractual terms, due to prepayments. The average life of mortgage loans tends to increase when current mortgage loan market rates are substantially higher than rates on existing mortgage loans and tends to decrease when current mortgage loan market rates are substantially lower than rates on existing mortgage loans. The following table sets forth at December 31, 2003, the dollar amount of loans due after December 31, 2004, based upon contractual maturity dates, and whether such loans have fixed interest rates for the life of the loan or adjustable interest rates: Due After December 31, 2004 ---------------------------------- Fixed Adjustable Total -------- ---------- -------- (In thousands) Mortgage Loans: One-to-four family & Construction $ 19,784 $ 40,809 $ 60,593 Commercial real estate 5,709 33,058 38,767 -------- -------- -------- Total mortgage loans 25,493 73,867 99,360 -------- -------- -------- Consumer loans 7,206 -- 7,206 -------- -------- -------- Commercial loans 1,420 235 1,655 -------- -------- -------- Total loans receivable, gross $ 34,119 $ 74,102 $108,221 ======== ======== ======== 10 Loan Origination, Commitment and Other Loan Fees In addition to interest earned on loans, the Company charges fees for originating and making loan commitments (which are included in interest income), prepayments of non-residential loans, late payments, changes in property ownership and other miscellaneous services. The income realized from such fees varies with the volume of loans made or repaid, and the fees vary from time to time depending upon the supply of funds and other competitive conditions in the mortgage markets. Loan demand and the availability of money also affect these conditions. Loan Delinquencies, Nonperforming Assets and Classified Assets Nonperforming assets include nonaccruing loans and real estate owned. The Company's policy is to stop accruing interest income when any loan is past due as to principal or interest in excess of 90 days and the ultimate collection of either is in doubt. Foreclosed real estate occurs when a borrower ultimately does not abide by the original terms of the loan agreement and the Company obtains title of the real estate securing the loan in foreclosure proceedings. At December 31, 2003, the Company had no restructured loans within the meaning of Financial Accounting Standards Board Statement 114. The following table is an analysis of the nonperforming assets and accruing loans 90 days or more past due at December 31, 2003, and December 31, 2002. 2003 2002 ------ ------ (Dollars in thousands) Mortgage loans $ 36 $ 198 Consumer loans 24 41 Commercial loans 229 180 ------ ------ Total non-performing loans 289 419 Real estate owned 4,216(1) 1,898 ------ ------ Total non-performing assets $4,505 $2,317 Accruing loans 90 days or more past due 162 236 ------ ------ Total non-performing assets and accruing loans 90 days or more past due $4,667 $2,553 ====== ====== Non-performing assets and accruing loans 90 days or more past due to total assets 2.40% 1.44% ====== ====== Non-performing loans to total loans, net 0.21% 0.40% ====== ====== (1) Subsequent to December 31, 2003, $2.5 million of the real estate owned was under lease with a purchase option. At December 31, 2003, there were no loans included in the above table considered potential problem loans that management expects will significantly impact future operating results, liquidity or capital resources or for which management is aware of any information that causes management to have serious doubts as to the ability of such borrowers to comply with the loan repayment terms. Interest income recognized on nonaccrual loans outstanding at December 31, 2003, would have increased by approximately $15,000, had interest income been recorded under the original terms of the loan. Interest income on non-performing loans included in interest income for the year ended December 31, 2003, was approximately $8,000. The Company had $145,000 and $27,000 of specific allowance related to the non-performing loans at December 31, 2003 and 2002. Allowance for Loan Losses Confirmed losses on loans are charged to the allowance for loan losses. Additions to this allowance are made by recoveries of loans previously charged off, as losses occur, and by provisions charged to expense. The determination of the balance of the allowance for loan losses is based on an analysis of the composition of the loan portfolio, current economic conditions, past loss histories and other factors that warrant recognition in providing for an adequate allowance. Losses ultimately confirmed will vary from original estimates, and adjustments, as necessary, are made in the period in which these factors and other relevant considerations become known. 11 The following table sets forth information regarding the allowance for loan losses for the years ended December 31, 2003 and 2002.
2003 2002 ------ ------ (Dollars in thousands) Balance at beginning of period $1,059 $ 775 Provision for loan losses 1,141 1,956 Charge-offs: Mortgage loans 578 389 Consumer loans 223 259 Commercial loans 81 1,081 ------ ------ Total Charge-offs 882 1,726 ------ ------ Recoveries: Mortgage loans 34 15 Consumer loans 44 39 Commercial loans 1 -- ------ ------ Total Recoveries 79 54 ------ ------ Charge-offs, net of recoveries 803 1,672 ------ ------ Balance at end of period $1,397 $1,059 ====== ====== Ratio of allowance for loan losses to total loans receivable at the end of period 1.03% 1.02% ====== ====== Ratio of allowance for loan losses to non-performing loans (1) 483.39% 252.74% ====== ====== Ratio of net charge-offs during the period to average loans outstanding during the period 0.65% 1.58% ====== ======
(1) Non-performing loans are comprised of nonaccrual loans. Specific reviews are performed to determine the collectibility and related allowance for loan losses on nonperforming loans. 12 The following table details the approximate allocation of the allowance for loan losses by category as of December 31, 2003 and 2002. See further discussion regarding the allowance for loan losses in "Management's Discussion and Analysis" in the Annual Report. 2003 2002 ---------------- ---------------- Amount Percent Amount Percent ------ ------- ------ ------- (Dollars in thousands) Mortgage loans $ 827 59.0% $ 212 20.0% Consumer loans 320 23.0 317 30.0 Commercial loans 250 18.0 530 50.0 ------ ----- ------ ----- Total $1,397 100.0% $1,059 100.0% ====== ===== ====== ===== Classified Assets Regulations provide for the classification of loans and other assets such as debt and equity securities considered to be of lesser quality as "substandard", "doubtful" or "loss" assets. Assets which do not currently expose the insured institution to a sufficient degree of risk to warrant classification in one of the aforementioned categories, but possess credit deficiencies or potential weaknesses, are required to be designated "special mention" by management. When an insured institution classifies problem assets as either substandard or doubtful, it is required to establish allowances for loan losses in an amount deemed prudent by management. When an insured institution classifies problem assets as "loss", it is required either to establish a specific allowance for losses equal to 100% of the amount of the asset so classified or to charge-off such amount. An institution's determination as to the classification of its assets and the amount of its valuation allowances is subject to review by its various regulators, which can order the establishment of additional general or specific loss allowances. At December 31, 2003, the Company had no assets classified as loss, $186,000 of assets classified as doubtful, $6.7 million of assets classified as substandard, and $2.9 million in assets designated as special mention. Total adversely classified assets (defined as those assets classified as substandard, doubtful and loss) represented 2.9% of total assets at December 31, 2003. At that date, primarily all of the classified assets were one-to-four family residences and commercial mortgage loans in the Company's market areas. INVESTMENT ACTIVITIES The Company had investments in mortgage-backed securities in the portfolio which are currently insured or guaranteed by the FNMA, GNMA or the FHLMC and have coupon rates as of December 31, 2003, ranging from 2.00% to 9.50%. At December 31, 2003, mortgage-backed securities totaled $1.3 million or 0.7% of total assets. At December 31, 2003, the Company had 15.90% of total assets in cash, cash equivalents, mortgage-backed securities and investment securities maturing in five years or less. The Company holds cash equivalents in the form of amounts due from depository institutions, overnight interest-bearing deposits in banks, and federal funds sold, the latter being generally sold for one day periods. The Board of Directors sets the investment policy. This policy dictates that investments will be made based on the following criteria: liquidity requirements, return on investment, and acceptable levels of interest rate risk and credit risk. The policy authorizes investment in various types of liquid assets permissible under applicable regulations, which include United States Government obligations, securities of various federal or federally-sponsored agency obligations, certain municipal obligations, certain corporate bonds, certain certificates of deposit of Board-approved banks and savings institutions and federal funds sold. The policy is to account for the investments as held-to-maturity or available-for-sale based on intent and ability. 13 The table below sets forth certain information regarding the liquidity and the fair value, weighted average yields and contractual maturities of the Company's investment securities designated as available-for-sale, at December 31, 2003. Certain of the U.S. Government agency securities could be called or prepaid prior to maturity.
After One Through After Five Through One Year or Less Five Years Ten Years -------------------- -------------------- -------------------- Weighted Weighted Weighted Amortized Average Amortized Average Amortized Average Cost Yield Cost Yield Cost Yield --------- -------- --------- -------- --------- -------- (Dollars in thousands) Interest bearing deposits $ 4,440 0.86% $ -- --% $ -- --% Federal funds 229 0.78 -- -- -- -- U.S. Government and agency securities (1) -- -- 12,017 3.12 84 6.00 Corporate Bonds -- -- 13,392 7.25 -- -- State, County and Municipal securities -- -- 100 6.00 -- -- After Ten Years Total -------------------- --------------------------------- Weighted Weighted Amortized Average Amortized Fair Average Cost Yield Cost Value Yield --------- -------- --------- ------- -------- (Dollars in thousands) Interest bearing deposits $ -- --% $ 4,440 $ 4,440 0.86% Federal funds -- -- 229 229 0.78 U.S. Government and agency securities (1) 1,219 3.82 13,320 13,379 3.20 Corporate Bonds 1,622 6.55 15,014 15,804 7.17 State, County and Municipal securities 100 5.00 200 212 5.50
(1) The securities are reflected in the above table based on their carrying value and contractual maturity. The weighted average yield does not include unrealized gains and losses on fair value of available-for-sale securities. 14 DEPOSITS, BORROWINGS AND OTHER SOURCES OF FUNDS General The Company's primary sources of funds are deposits and borrowings and principal, interest and dividend payments on loans, mortgage-backed securities and investments, as applicable. Deposits The Company offers a variety of deposit accounts having a range of interest rates and terms. Deposits consist of savings accounts, checking accounts, money market deposits, IRA and certificate accounts. The Company currently has four ATM facilities and issues ATM/Debit cards on checking accounts. Compound interest is paid on most deposits. The flow of deposits is influenced significantly by general economic conditions, changes in money markets and prevailing interest rates and competition. Deposits are obtained primarily from the areas in which the branches are located. The Company also maintains collateralized deposits in excess of $100,000 held by the State of Alabama and certain other depositors. Generally, deposit rates are priced relative to existing treasury market rates. The Company relies primarily on customers as their source to attract and retain these deposits. The Company does not seek and has no brokered deposits as of December 31, 2003. Average Balance and Average Rate of Deposits The average balance of deposits and average rates are summarized for the years ended December 31, 2003 and 2002, in the following table. Year Ended Year Ended December 31, 2003 December 31, 2002 ----------------- ----------------- Amount Rate Amount Rate ------ ---- ------ ---- (Dollars in thousands) Transaction accounts $34,146 0.13% $30,842 0.25% Savings accounts 25,164 0.62 23,457 0.98 Certificates 87,727 3.35 90,795 4.09 Large Certificates of Deposit The following table indicates the amount of the Banks' certificates of deposit of $100,000 or more by time remaining until maturity as of December 31, 2003. Maturity Period Amount - --------------- ------- (In thousands) Three months or less $ 2,009 Over three through six months 2,447 Over six through 12 months 3,393 Over 12 months 11,862 ------- Total $19,711 ======= Borrowings/FHLB Advances Deposits are the Company's primary source of funds. The Company's policy has been to utilize borrowings only when necessary and when they are a less costly source of funds or can be invested at a positive rate of return. The Company may obtain advances from the FHLB-Atlanta upon the security of its capital stock of the FHLB-Atlanta and certain of its mortgage loans. Such advances may be made pursuant to several different credit programs, each of which has its own interest rate and range of maturities. The maximum amount that the FHLB-Atlanta advances to a member institution generally is reduced by borrowings from any other source. At December 31, 2003, there were $17 million in FHLB advances. The advances are at a fixed rate of 5.20% and have a contractual maturity of January 12, 2011. On January 12, 2006, the FHLB has the option to convert the whole advance to a three month floating LIBOR, at which time the Company may terminate the advance. At December 31, 2003, there were $5.7 million in FHLB overnight borrowings. The borrowings are at an adjustable rate with a rate of 1.15% at December 31, 2003. 15 The Company has a line of credit for $1,500,000, with an outstanding balance of $1,080,000 at December 31, 2003. The line of credit is at a variable rate based on London Interbank Offered Rate ("LIBOR") plus 2.25% and has a maturity date of May 20, 2003. CONTRACTUAL OBLIGATIONS The following table indicates the Company's contractual obligations as of December 31, 2003: Term ------------------------------------------------------------ Less Than Total 1 Year 1-3 Years 3-5 Years 5+ Years -------- --------- --------- --------- -------- (In thousands) FHLB Advances $ 17,000 $ -- $ -- $ -- $ 17,000 Time Deposits 89,746 44,115 32,642 12,989 -- -------- -------- -------- -------- -------- Total $106,746 $ 44,115 $ 32,642 $ 12,989 $ 17,000 ======== ======== ======== ======== ======== The Company has no capital lease obligations and the operating lease obligations are not material. COMPETITION The Company faces strong competition both in making loans and in attracting deposits. A large number of financial institutions, including commercial banks, savings associations, credit unions, and other nonbank financial companies, compete in the greater Birmingham, Alabama, metropolitan area, in which the primary service areas of the Company are located. Most of these companies are competitors of the Company to varying degrees. The Company also competes with many larger banks and other financial institutions that have offices over a wide geographic area. REGULATION, SUPERVISION AND GOVERNMENTAL POLICY General The Company is a bank holding company that has elected to be a financial holding company under the Gramm-Leach- Bliley Act of 1999 (the "GLB Act"). As a financial holding company, the Company is subject to FRB regulation and supervision under the Bank Holding Company Act of 1956, as amended (the "BHC Act"). The Company also is required to file certain reports with, and otherwise comply with the rules and regulations of, the Securities and Exchange Commission ("SEC") under the federal securities laws including the Securities Exchange Act of 1934, as amended (the "Exchange Act"). First Financial Bank, as an Alabama commercial bank that is not a member of the Federal Reserve System, is subject to regulation, supervision and regular examination both by the Banking Department and by the FDIC. The deposits of the Company are insured by the FDIC to the maximum extent provided by law (a maximum of $100,000 for each insured depositor). Federal and Alabama banking laws and regulations control, among other things, the Company's required reserves, investments, loans, mergers and consolidations, issuance of securities, payment of dividends and other aspects of the Company's operations. Supervision, regulation and examination by the bank regulatory agencies are intended primarily for the protection of depositors rather than for holders of the Company's stock or for the Company as the holder of the stock of First Financial Bank. These regulators have adopted guidelines regarding the capital adequacy of institutions under their respective jurisdictions, which require such institutions to maintain specified minimum ratios of capital to total assets and capital to risk-weighted assets. See Note 18 of Notes to Consolidated Financial Statements. First Financial Bank is prohibited from paying any dividends or other capital distributions if, after the distribution, it would be undercapitalized under the applicable regulations. In addition, under Alabama Law, the approval of the Alabama Superintendent of Banks is required if the total of all the dividends declared by First Financial Bank in any calendar year exceeds net income as defined for that year combined with its retained net income for the preceding two calendar years. See Note 13 to Consolidated Financial Statements. 16 Sarbanes-Oxley Act of 2002 The Sarbanes- Oxley Act of 2002 provides for sweeping changes with respect to corporate governance, accounting policies and disclosure requirements for public companies, and also for their directors and officers. Pursuant to the Sarbanes-Oxley Act, the SEC has adopted new financial reporting requirements and rules concerning corporate governance. A reporting company's chief executive and chief financial officers are required to certify certain financial and other information included in the company's quarterly and annual reports. The rules also require these officers to certify that they are responsible for establishing, maintaining and regularly evaluating the effectiveness of the company's disclosure controls and procedures; that they have made certain disclosures to the auditors and to the audit committee of the board of directors about the company's controls and procedures; and that they have included information in their quarterly and annual filings about their evaluation and whether there have been significant changes to the controls and procedures or other factors which would significantly impact these controls subsequent to their evaluation. Certifications by the Company's Chief Executive Officer and Chief Financial Officer of the financial statements and other information have been filed as exhibits to this Annual Report on Form 10-KSB. See Item 8A ("Controls and Procedures") hereof for the Company's evaluation of disclosure controls and procedures. The certifications required by Section 906 of the Sarbanes-Oxley Act have also been filed as exhibits to this Form 10-KSB. USA Patriot Act The President of the United States signed the USA Patriot Act into law in 2001. The USA Patriot Act authorizes new regulatory powers to combat international terrorism. The provisions that affect financial institutions most directly provide the federal government with enhanced authority to identify, deter, and punish international money laundering and other crimes. Among other things, the USA Patriot Act prohibits financial institutions from doing business with foreign "shell" banks and requires increased due diligence for private banking transactions and correspondent accounts for foreign banks. In addition, financial institutions have to follow new minimum verification of identity standards for all new accounts and are permitted to share information with law enforcement authorities under circumstances that were not previously permitted. Financial Modernization Act The GLB Act significantly changed the regulatory structure and oversight of the financial services industry and expanded financial affiliation opportunities for bank holding companies. Among other changes, the GLB Act permits "financial holding companies" to engage in a range of activities that are "financial in nature" or "incidental" thereto, such as banking, insurance, securities activities, and merchant banking. To qualify to engage in expanded financial activities, a financial holding company must make certain required regulatory filings, and subsidiary depository institutions must be well-capitalized, well-managed and rated "satisfactory" or better under the Community Reinvestment Act. The Company meets these requirements and has become a financial holding company. The GLB Act prohibits financial institutions from sharing non-public financial information on their customers to non- affiliated third parties unless the customer is provided the opportunity to opt-out or the customer consents. However, the GLB Act allows a financial institution to disclose confidential information to non-affiliated third parties pursuant to a joint marketing agreement (after full disclosure to the customer), to perform services on behalf of the institution, to market the institution's own products, and to protect against fraud. The federal banking agencies have issued regulations implementing privacy provisions of the GLB Act. Effects of Governmental Policy The earnings and business of the Company are affected by the policies of various regulatory authorities of the United States, particularly the FRB. Important functions of the FRB, in addition to those enumerated above, include the regulation of the supply of money in light of general economic conditions within the United States. The instruments of monetary policy employed by the FRB for these purposes influence in various ways the overall level of investments, loans, other extensions of credit and deposits, and the interest rates paid on liabilities and received on interest-earning assets. The nature and timing of any future changes in the regulatory policies of the FRB and other federal agencies and their impact on the Company are not predictable. 17 TAXATION Federal Taxation The following discussion of tax matters is intended only as a summary and does not purport to be a comprehensive description of the tax rules applicable to the Company. For federal income tax purposes, the Company reported its income and expenses on the accrual method of accounting under SFAS No. 109, "Accounting for Income Taxes" and files its federal income tax returns on a consolidated basis. For its taxable year ended December 31, 2003, the Company was subject to a maximum federal income tax rate of 34%. The Company has not been audited by the Internal Revenue Service for any recent year subject to audit. See Notes to Consolidated Financial Statements for additional information related to income taxes. Corporate Alternative Minimum Tax The Company is subject to taxes based on alternative minimum taxable income ("AMTI") at a 20% tax rate. AMTI is increased by an amount equal to 75% of the amount by which a corporation's adjusted current earnings exceeds its AMTI (determined without regard to this preference and prior to reduction for net operating losses). State and Local Taxation The State of Alabama imposes a 6.5% excise tax on the earnings of financial institutions such as First Financial Bank. The 6.5% excise tax also applies to the Company. In addition to the excise taxes, the State of Alabama imposes an annual state privilege tax for domestic and foreign corporations. The privilege tax is assessed on corporations doing business in the State of Alabama and is applied to each taxpayer's capital employed in the State of Alabama. Each corporation's investment in the capital of a taxpayer doing business in Alabama is excluded from the taxable base. The Company is subject to the Delaware franchise tax. PERSONNEL As of December 31, 2003, the Company had 80 full-time employees and 2 part-time employees. The employees are not represented by a collective bargaining unit, and the Company considers its relationship with the employees to be good. ITEM 2. DESCRIPTION OF PROPERTY: First Financial Bank conducts its business through its main office located in Bessemer, Alabama, and seven branch offices located in Centreville, Hoover, Hueytown, Pelham, Vance, West Blocton and Woodstock, Alabama. The Company believes that the current facilities are adequate to meet its present and immediately foreseeable needs. The following table sets forth information relating to each of the offices as of December 31, 2003, which totaled a net book value of $4,908,000. See also Notes 1 and 5 of Notes to Consolidated Financial Statements. 18 Leased Or Date Net Book Value at Owned Opened December 31, 2003 ----- ------ ----------------- (In thousands) Main Office - 1630 Fourth Avenue, No Owned 1961 $ 859(3) Bessemer, Alabama 35020 Branches - 125 Birmingham Rd Owned 1979 47(3) Centreville, Alabama 35042 1604 Montgomery Hwy Hoover, Alabama 35216 Owned 1992 440(3) 1351 Hueytown Road Hueytown, Alabama 35023 Owned 1966 889(3) Food World Plaza Pelham, Alabama 35124 Leased(1) 1973 N/A(2) 3304 Pelham Parkway Pelham, Alabama 35124 Owned 5/2004 632(4) 18704 Highway 11, North Vance, Alabama 35490 Owned 1997 401(3) Main Street Owned 1965 262(3) West Blocton, Alabama 35184 Highway 5 Owned 1985 154(3) Woodstock, Alabama 35188 Other fixed assets, net 1,224 ------ Total $4,908 ====== - ---------- (1) The lease expires May 31, 2004. See (4) below. (2) The lease is classified as an operating lease. (3) Includes land, building and improvements. (4) This represents a new Pelham office under construction which will be opened in May 2004. ITEM 3. LEGAL PROCEEDINGS: From time to time, the Company is a party to routine legal proceedings occurring in the ordinary course of business. At December 31, 2003, there were no legal proceedings to which the Company was a party, or to which any of its property was subject, which were expected by management to result in a material loss. For a further discussion of legal matters, see Notes to Consolidated Financial Statements in the Company's December 31, 2003 Annual Report to Stockholders (the "Annual Report"). ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS: No matters were submitted to a vote of security holders during the fourth quarter of the year ended December 31, 2003. PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS: The information contained under the caption "Introduction" in the Annual Report is incorporated herein by reference. 19 ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION: The information contained in the section captioned "Management's Discussion and Analysis" in the Annual Report is incorporated herein by reference. ITEM 7. FINANCIAL STATEMENTS: The reports of independent public accountants and consolidated financial statements contained in Exhibit 13 are incorporated herein by reference. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE: The information contained in the section captioned "Management's Discussion and Analysis - Change In Independent Public Accountants" in the Annual Report is incorporated herein by reference. ITEM 8A. CONTROLS AND PROCEDURES: The Company carried out an evaluation under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and the Company's Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures as of December 31, 2003, pursuant to Exchange Act Rule 13a-15(b). Based upon that evaluation, the Company's Chief Executive Officer and the Company's Chief Financial Officer concluded that the Company's disclosure controls and procedures, as designed and implemented, are effective in alerting them in a timely manner to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company's periodic SEC filings. In addition, the company reviewed its internal controls. There has been no change in the Company's internal control over financial reporting during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect the Company's internal control over financial reporting. Disclosure controls and procedures are designed to ensure that information required to be disclosed in reports filed by the Company under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. Disclosure controls are also designed with the objective of ensuring that such information is accumulated and communicated to the Company's management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Disclosure controls include internal controls that are designed to provide reasonable assurance that transactions are properly authorized, assets are safeguarded against unauthorized or improper use and transactions are properly recorded and reported. Any control system, no matter how well conceived and operated, can provide only reasonable assurance that its objectives are achieved. The design of a control system inherently has limitations, including the controls' cost relative to their benefits. Additionally, controls can be circumvented. No cost-effective control system can provide absolute assurance that all control issues and instances of fraud, will be detected. PART III ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT: The information contained under the section captioned "Proposal I--Election of Directors" in the Company's definitive proxy statement for the Company's annual meeting of stockholders (the "Proxy Statement") is incorporated herein by reference. Information regarding Forms 3, 4 or 5 filers is incorporated by reference to the section in the Proxy Statements entitled "Section 16(a) Beneficial Ownership Reporting Compliance." The Company has adopted a Code of Ethics that applies to all employees, including without exception, the principal executive officer, principal financial officer, principal accounting officer and/or controller, or persons performing similar functions. The Code of Ethics is attached as Exhibit 14 to this Form 10-KSB. The Company has adopted an Audit Committee Charter and a Nominating and Corporate Governance Committee Charter, both of which are attached as appendices to the Company's definitive proxy statement dated March 22, 2004. 20 The Code of Ethics, Audit Committee Charter and Nominating and Corporate Governance Committee Charter are not currently available on the Company's website. ITEM 10. EXECUTIVE COMPENSATION: The information contained in the sections captioned "Proposal I--Election of Directors --Executive Compensation and Other Benefits" and "--Directors' Compensation" in the Proxy Statement is incorporated herein by reference. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS: (a) Equity Compensation Plans - Information required by this item is incorporated herein by reference to the section in the Proxy Statement captioned "Equity Compensation Plans". (b) Security Ownership of Certain Beneficial Owners - Information required by this item is incorporated herein by reference to the section captioned "Security Ownership of Certain Beneficial Owners and Management." (c) Security Ownership of Management - Information required by this item is incorporated herein by reference to the sections captioned "Proposal I-- Election of Directors" and "Security Ownership of Certain Beneficial Owners and Management" in the Proxy Statement. (d) Changes in Control - Management of the Company is not aware of any arrangements, including any pledge by any person of securities of the Company, the operation of which may at a subsequent date result in a change in control of the Company. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS: The information required by this item is incorporated herein by reference to the section captioned "Proposal I--Election of Directors -- Transactions with Management" in the Proxy Statement. ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K: (a) Exhibits-The following is a list of exhibits filed as part of this Annual Report on Form 10-KSB and is also the 0xhibit Index: 3.1 Certificate of Incorporation of FirstFed Bancorp, Inc. (A) 3.2 Bylaws of FirstFed Bancorp.Inc. (A) 4.0 Stock Certificate of FirstFed Bancorp, Inc. (A) 10.01 First Federal Savings Bank Outside Directors' Recognition and Retention Plan and Trust Agreement (C) 10.02 First Federal Savings Bank Recognition and Retention Plan and Trust Agreement "B" (C) 10.03 FirstFed Bancorp, Inc. 1991 Incentive Stock Option Plan (C) 10.04 FirstFed Bancorp, Inc. 1991 Stock Option Plan for Outside Directors as amended (C) 10.05 Form of Indemnification Agreement (B) 10.06 FirstFed Bancorp, Inc. Deferred Compensation Plan, as amended (E) 10.07 FirstFed Bancorp, Inc. Incentive Compensation Plan, as amended (D) 10.08 Employment Agreement dated January 1, 1996 by and between FirstFed Bancorp, Inc. and B. K. Goodwin, III, as amended (D) 10.09 Employment Agreement dated January 1, 1996 by and between First Federal Savings Bank and B. K. Goodwin, III, as amended (D) 10.10 Employment Agreement dated January 1, 1996 by and between FirstFed Bancorp, Inc., First Federal Savings Bank and Lynn J. Joyce, as amended (D) 10.11 FirstFed Bancorp, Inc. 1995 Stock Option and Incentive Plan, as amended (D) 10.12 FirstFed Bancorp, Inc. 2001 Stock Incentive Plan (F) 11.0 Statement of Computation of Earnings Per Share (G) 21 13.0 December 31, 2003 Annual Report - Filed herewith only as to those portions of the Annual Report to stockholders for the year ended December 31, 2003, which are expressly incorporated herein by reference. 14.0 FirstFed Bancorp, Inc. Code of Ethics 21.0 Subsidiaries of the Registrant (filed herewith) 23.0 Consent of Independent Public Accountants (filed herewith) 31.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted to Section 906 of the Sarbanes-Oxley Act of 2002 A. Incorporated herein by reference into this document from the Exhibits of the Form S-1, Registration Statement, filed on July 3, 1991. B. Incorporated herein by reference into this document from the Annual Report on Form 10-K for the year ended March 31, 1993. C. Incorporated herein by reference into this document from the Annual Report on Form 10-K for the year ended March 31, 1994. D. Incorporated herein by reference into this document from the Annual Report on Form 10-KSB for the year ended March 31, 1998. E. Incorporated herein by reference into this document from the Annual Report on Form 10-KSB for nine months ended December 31, 1998. F. Incorporated herein by reference into this document from the Annual Report on Form 10-KSB for the year ended December 31, 2000. G. Incorporated herein by reference into this document from the December 31, 2003 Annual Report, Exhibit 13.0 hereto. (b) Reports on Form 8-K: Current Report on Form 8-K dated October 27, 2003, reporting under Item 12 ("Results of Operations and Financial Conditions") the Company's results of operations for the quarter ended September 30, 2003. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES: The information required by this item is incorporated herein by reference to the sections captured "Proposal II - Ratification of Appointment of Independent Auditors - Audit Fees and Other Matters" and "- - Pre-approval Policy" in the Proxy Statement. 22 SIGNATURES In accordance with Section 13 or 15 (d) of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FIRSTFED BANCORP, INC. Date: March 26, 2004 /s/ B. K. Goodwin, III ---------------------------------------- B. K. Goodwin, III Chairman of the Board, Chief Executive Officer and President In accordance with the Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ B. K. Goodwin, III Chairman of the Board, Chief Date: March 26, 2004 - ------------------------- Executive Officer and B. K. Goodwin, III President /s/ Lynn J. Joyce Chief Financial Officer, Date: March 26, 2004 - ------------------------- Executive Vice President, Lynn J. Joyce Secretary and Treasurer /s/ Fred T. Blair Director Date: March 26, 2004 - ------------------------- Fred T. Blair /s/ James B. Koikos Director Date: March 26, 2004 - ------------------------- James B. Koikos /s/ E. H. Moore, Jr. Director Date: March 26, 2004 - ------------------------- E. H. Moore, Jr. /s/ James E. Mulkin Director Date: March 26, 2004 - ------------------------- James E. Mulkin /s/ G. Larry Russell Director Date: March 26, 2004 - ------------------------- G. Larry Russell 23 EX-13 3 ex13.txt INTRODUCTION FirstFed Bancorp, Inc. (the "Company") is a financial holding company located in Bessemer, Alabama. Through its subsidiary, First Financial Bank, an Alabama-chartered commercial bank, it serves portions of Jefferson, Shelby, Bibb and Tuscaloosa counties. In March 2002, First Financial Bank was created by the merger of two existing subsidiaries, First Federal Savings Bank and First State Bank of Bibb County. The resulting institution then adopted its current corporate title, "First Financial Bank". Offices are located in Bessemer, Centreville, Hoover, Hueytown, Pelham, Vance, West Blocton and Woodstock. The Company's common stock trades on the NASDAQ SmallCap Stock Market under the symbol "FFDB". As of December 31, 2003, there were 2,375,537 shares of common stock outstanding and approximately 375 holders of record of the common stock. The following table sets forth the stock market price ranges of the common stock as reported by NASDAQ SmallCap Market Systems and cash dividends declared per share of common stock for the calendar quarters as indicated. Stock Market Cash Price Range Dividends ---------------- Declared Low High Per Share --- ---- --------- Year Ended December 31, 2002: First Quarter $6.20 $7.20 $ .14 Second Quarter 6.75 7.40 .07 Third Quarter 6.02 8.00 .07 Fourth Quarter 5.83 7.90 .07 Year Ended December 31, 2003: First Quarter $6.10 $7.69 $ .14 Second Quarter 6.28 7.78 .07 Third Quarter 7.25 8.12 .07 Fourth Quarter 8.00 9.21 .07 ================================================================================ LETTER TO STOCKHOLDERS In reviewing the year 2003, there were several significant events. The Company achieved excellent growth, including exceptional growth in loans of over 30%. It was partially accomplished from the purchase of a branch in Centreville, Alabama, with approximately $8.3 million in deposits and $5.6 million in loans. This transaction enabled the Company to expand and further utilize the existing Centreville branch as the purchased branch was closed. The growth was also accomplished in traditional commercial banking products, including commercial real estate loans and deposit transaction accounts. As loans have grown throughout the year and replaced lower yielding assets, the interest rate spread has begun to improve. The earnings results for 2003 reflected improvement over the prior year, but did not return to the levels of previous years. As witnessed by community banks in general, our Bank has endured a reduction in interest rate spread. Also, a negative factor impacting results was the write-down of several commercial real estate loans throughout the year. On the other hand, at December 31, 2003, total nonperforming loans decreased to $289,000, or 0.2% of loans receivable, compared to $419,000, or 0.4% of loans receivable at December 31, 2002. Past due loans decreased to $2.3 million, or 1.7% of loans receivable, from $4.8 million, or 4.6%. We believe this reduction in nonperforming and past due loans will contribute to more favorable future results. I would like to also share some other significant events with you. We are currently in process of constructing a new and expanded full-service facility in Pelham, Alabama. We have outgrown the existing Pelham location which has been under lease. Also, in December 2003, we launched a new checking account called "Beyond Free Checking". This is a totally free checking account with Overdraft Privilege. The Overdraft Privilege Program has been extended to the majority of our customers. The Company continued the tradition of paying quarterly dividends of $.07 per share plus a special dividend of $.07 per share, for a total annual cash dividend of $.35 per share. We are also pleased to report that the market trading value of the Company's stock increased during 2003. As we noted last year, the Company has experienced a period of transition and change. We continue to see the benefits of changes and believe the Company is well-positioned for the future. As always, we appreciate your support and interest in our Company. I look forward to reporting to you next year on our continued progress. Sincerely, B. K. Goodwin, III Chairman of the Board, Chief Executive Officer and President ================================================================================ 1 ================================================================================ FIRSTFED BANCORP, INC. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION As of December 31, 2003 and 2002 (Dollar amounts in thousands, except share amounts)
2003 2002 --------- --------- ASSETS Cash and cash equivalents: Cash on hand and in banks $ 2,952 $ 2,919 Interest-bearing deposits in other banks 4,440 21,739 Federal funds sold 229 774 --------- --------- 7,621 25,432 Securities available-for-sale 30,740 30,632 Loans held for sale 1,033 2,229 Loans receivable, net of allowance for loan losses of $1,397 and $1,059, respectively 136,099 104,310 Land, buildings and equipment, net 4,908 4,265 Bank owned life insurance 6,009 5,641 Real estate owned 4,216 1,898 Accrued interest receivable 1,095 1,342 Goodwill and other intangibles 1,216 983 Other assets 1,274 838 --------- --------- $ 194,211 $ 177,570 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposits $ 151,109 $ 139,931 Borrowings 23,780 18,005 Accrued interest payable 217 232 Dividend payable 166 163 Other liabilities 387 431 --------- --------- 175,659 158,762 --------- --------- Stockholders' equity: Preferred stock, $.01 par value, 1,000,000 shares authorized, none issued and outstanding -- -- Common stock, $.01 par value, 10,000,000 shares authorized, 3,205,485 issued and 2,375,537 outstanding at December 31, 2003 and 3,159,140 issued and 2,329,192 outstanding at December 31, 2002 32 32 Paid-in capital 8,426 8,159 Retained earnings 16,047 16,467 Deferred compensation obligation 1,969 1,876 Deferred compensation treasury stock (221,283 shares at December 31, 2003 and 209,812 shares at December 31, 2002) (1,969) (1,876) Treasury stock, at cost (829,948 shares at December 31, 2003 and 2002) (6,088) (6,088) Unearned compensation (416) (518) Accumulated other comprehensive income, net 551 756 --------- --------- 18,552 18,808 --------- --------- $ 194,211 $ 177,570 ========= =========
The accompanying notes are an integral part of these consolidated financial statements. ================================================================================ 2 ================================================================================ FIRSTFED BANCORP, INC. CONSOLIDATED STATEMENTS OF INCOME For the Years Ended December 31, 2003 and 2002 (Dollar amounts in thousands, except share amounts)
2003 2002 ----------- ----------- INTEREST INCOME Interest and fees on loans $ 7,473 $ 8,429 Interest and dividends on securities: Taxable 1,350 1,884 Tax exempt 23 32 Other interest income 159 320 ----------- ----------- Total interest income 9,005 10,665 ----------- ----------- INTEREST EXPENSE Interest on deposits 3,137 4,021 Interest on borrowings 900 895 ----------- ----------- Total interest expense 4,037 4,916 ----------- ----------- Net interest income 4,968 5,749 Provision for loan losses 1,141 1,956 ----------- ----------- Net interest income after provision for loan losses 3,827 3,793 ----------- ----------- NONINTEREST INCOME Service and other charges on deposit accounts 1,457 1,246 Gain on sale of investments 299 8 Gain on sale of loans -- 482 Bank owned life insurance 368 346 Other income 215 150 ----------- ----------- Total noninterest income 2,339 2,232 ----------- ----------- NONINTEREST EXPENSE Salaries and employee benefits 3,152 2,983 Nonrecurring pension expense -- 238 Office building and equipment expense 805 700 Data processing expense 421 462 Other operating expense 1,399 1,542 ----------- ----------- Total noninterest expense 5,777 5,925 ----------- ----------- Income before income taxes 389 100 Benefit for income taxes (14) (101) ----------- ----------- NET INCOME $ 403 $ 201 =========== =========== AVERAGE NUMBER OF SHARES OUTSTANDING - BASIC 2,314,055 2,277,916 =========== =========== BASIC EARNINGS PER SHARE $ .17 $ .09 =========== =========== AVERAGE NUMBER OF SHARES OUTSTANDING - DILUTED 2,355,219 2,308,901 =========== =========== DILUTED EARNINGS PER SHARE $ .17 $ .09 =========== =========== DIVIDENDS DECLARED PER SHARE $ .35 $ .35 =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. ================================================================================ 3 ================================================================================ FIRSTFED BANCORP, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME For the Years Ended December 31, 2003 and 2002 (Dollar amounts in thousands, except share amounts)
Deferred Deferred Compen- Compen- sation Common Paid-In Retained sation Treasury Stock Capital Earnings Obligation Stock -------- -------- -------- ---------- --------- BALANCE, December 31, 2001 $ 31 $ 8,081 $ 17,079 $ 1,766 $ (1,792) Net income -- -- 201 -- -- Change in unrealized gain on securities available- for-sale, net of tax of ($394) -- -- -- -- -- Comprehensive income -- -- -- -- -- Amortization of unearned compensation -- -- -- -- -- Awards under stock plans -- 4 -- -- -- Dividends declared ($.35 per share) -- -- (813) -- -- Change in stock value of Employee Stock Ownership Plan -- (33) -- -- -- Purchase of Deferred Compensation TreasuryStock -- -- -- 114 (114) Distribution of Deferred Compensation Treasury Stock -- -- -- (30) 30 Amortization of Deferred Compensation -- -- -- 26 -- Stock issued under Dividend Reinvestment Plan 1 107 -- -- -- -------- -------- -------- -------- -------- BALANCE, December 31, 2002 $ 32 $ 8,159 $ 16,467 $ 1,876 $ (1,876) Net income -- -- 403 -- -- Change in unrealized gain on securities available- for-sale, net of tax of ($123) -- -- -- -- -- Comprehensive income -- -- -- -- -- Amortization of unearned compensation -- -- -- -- -- Awards under stock plans -- 30 -- -- -- Exercise of stock options -- 146 -- -- -- Dividends declared ($.35 per share) -- -- (823) -- -- Change in stock value of Employee Stock Ownership Plan -- (25) -- -- -- Purchase of Deferred Compensation Treasury Stock -- -- -- 116 (116) Distribution of Deferred Compensation Treasury Stock -- -- -- (23) 23 Stock issued under Dividend Reinvestment Plan -- 116 -- -- -- -------- -------- -------- -------- -------- BALANCE, December 31, 2003 $ 32 $ 8,426 $ 16,047 $ 1,969 $ (1,969) ======== ======== ======== ======== ======== Accumulated Other Unearned Compre- Compre- Treasury Compen- hensive hensive Stock sation Income (Loss) Income --------- --------- ------------- ----------- BALANCE, December 31, 2001 $ (6,088) $ (666) $ 55 Net income -- -- -- $201 Change in unrealized gain on securities available- for-sale, net of tax of ($394) -- -- 701 701 ------ Comprehensive income -- -- -- $902 ====== Amortization of unearned compensation -- 152 -- Awards under stock plans -- (4) -- Dividends declared ($.35 per share) -- -- -- Change in stock value of Employee Stock Ownership Plan -- -- -- Purchase of Deferred Compensation TreasuryStock -- -- -- Distribution of Deferred Compensation Treasury Stock -- -- -- Amortization of Deferred Compensation -- -- -- Stock issued under Dividend Reinvestment Plan -- -- -- -------- -------- -------- BALANCE, December 31, 2002 $ (6,088) $ (518) $ 756 Net income -- -- -- $403 Change in unrealized gain on securities available- for-sale, net of tax of ($123) -- -- (205) (205) ------ Comprehensive income -- -- -- $198 ====== Amortization of unearned compensation -- 132 -- Awards under stock plans -- (30) -- Exercise of stock options -- -- -- Dividends declared ($.35 per share) -- -- -- Change in stock value of Employee Stock Ownership Plan -- -- -- Purchase of Deferred Compensation Treasury Stock -- -- -- Distribution of Deferred Compensation Treasury Stock -- -- -- Stock issued under Dividend Reinvestment Plan -- -- -- -------- -------- -------- BALANCE, December 31, 2003 $ (6,088) $ (416) $ 551 ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. ================================================================================ 4 ================================================================================ FIRSTFED BANCORP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2003 and 2002 (Dollar amounts in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES: 2003 2002 -------- -------- Net income $ 403 $ 201 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation, amortization and accretion 501 292 Provision (credit) for deferred income taxes (179) 304 Provision for loan losses 1,141 1,956 Provision for real estate losses -- 14 Loan fees (cost) deferred, net 230 (31) Gain on sale of investments (299) -- Gain on sale of fixed assets -- (91) Gain on sale of loans -- (482) Loss on sale of real estate, net 70 75 Origination of loans held for sale (19,656) (15,847) Proceeds from the sale of loans held for sale 20,852 25,610 Provision for deferred compensation 116 114 Increase in surrender value of Bank Owned Life Insurance (368) (346) Decrease (increase) in operating assets, net of effects of purchase of branch: Accrued interest receivable 247 498 Other assets (92) 137 Increase (decrease) in operating liabilities, net of effects of purchase of branch: Accrued interest payable (15) (71) Other liabilities (44) (508) -------- -------- Net cash provided by (used in) operating activities 2,907 11,825 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Cash acquired in purchase of branch, net 2,458 -- Proceeds from maturities, calls and repayments of securities available-for-sale 7,269 7,890 Proceeds from maturities and payments received on securities held-to-maturity -- 3,827 Proceeds from the sale of securities held-to-maturity -- 1,472 Proceeds from sale of securities available-for-sale 6,048 -- Purchase of securities held-to-maturity -- (4,000) Purchase of securities available-for-sale (13,610) (3,495) Purchase of Bank Owned Life Insurance -- (750) Proceeds from sale of real estate and repossessed assets 1,618 2,189 Net loan originations (31,514) (9,218) Proceeds from sale of fixed assets -- 116 Capital expenditures (963) (1,077) -------- -------- Net cash provided by (used in) investing activities (28,694) (3,046) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Increase (decrease) in deposits, net 2,878 (6,138) Repayment of borrowings (5,250) -- Proceeds from borrowings 11,025 1,005 Proceeds from exercise of stock options 146 -- Proceeds from dividend reinvestment 116 107 Cash dividends paid (823) (812) Purchase of treasury stock for Deferred Compensation Plan (116) (114) -------- -------- Net cash provided by (used in) financing activities 7,976 (5,952) -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (17,811) 2,827 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 25,432 22,605 -------- -------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 7,621 $ 25,432 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. ================================================================================ 5 FIRSTFED BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003 and 2002 1. SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES: Organization and Basis of Presentation FirstFed Bancorp, Inc. (the "Company") is the holding company and sole shareholder of First State Corporation ("FSC"). FSC is the sole shareholder of First Financial Bank (the "Bank"). There are no material assets in FSC except for the investment in the Bank. The accompanying consolidated financial statements include the accounts of the Company, the Bank and FSC. At the beginning of the prior year, the Company was the holding Company and sole shareholder of First Federal Savings Bank ('First Federal") and FSC. FSC was the sole shareholder of First State Bank of Bibb County ("First State"). During 2002, First Federal and First State were merged and the name changed to First Financial Bank. All significant intercompany balances and transactions have been eliminated in consolidation. Nature of Operations The Bank, through eight branch offices located in Alabama, is engaged in a full range of banking services. Those services consist of providing various deposit opportunities to customers and originating 1-4 family mortgage loans, commercial real estate loans, commercial and installment loans. These services are provided in portions of the Birmingham metropolitan areas and counties surrounding its south and west borders. Pervasiveness of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The primary estimate herein is the allowance for loan losses. Securities The Company classifies securities as either available-for-sale or held-to-maturity based on management's intent at the time of purchase and the Company's ability to hold such securities to maturity. During 2002, management decided to reclassify all previously classified held-to-maturity securities as available-for-sale. Securities designated as available-for-sale are carried at fair value. The unrealized difference between amortized cost and fair value of securities available-for-sale is excluded from earnings and is reported net of deferred taxes as a component of stockholders' equity in accumulated other comprehensive income. This caption includes securities that management intends to use as part of its asset/liability management strategy or that may be sold in response to changes in interest rates, changes in prepayment risk, liquidity needs, or for other purposes. Gains and losses on the sale of available-for-sale securities are determined using the specific identification method. Restricted stock consists primarily of Federal Home Loan Bank ("FHLB") stock, a required stock holding, and is carried at cost, as there is no readily available market for these shares and management believes fair value approximates cost. Premiums and discounts are recognized in interest income using a method that approximates the effective interest method. Loans Held for Sale Loans held for sale are recorded at the lower of amortized cost or fair value, as such loans are not intended to be held to maturity. As of December 31, 2003 and 2002, loans held for sale consisted of mortgage loans that have been committed for sale to third-party investors. Loans Receivable Loans receivable are stated at unpaid principal balances, net of the allowance for loan losses and deferred loan origination fees and costs. Interest is credited to income based upon the recorded investment. The accrual of interest on loans is discontinued and an allowance established when a loan becomes 90 days past due and, in the opinion of management, there is an indication that the borrower may be unable to meet payments as they become due. Upon such 6 discontinuance, all unpaid accrued interest is reversed against current income unless the collateral for the loan is sufficient to cover the accrued interest. Interest received on nonaccrual loans generally is either applied against principal or reported as interest income, according to management's judgment as to the collectibility of principal. Generally, loans are restored to accrual status when the obligation is brought current and the ultimate collectibility of the total contractural principal and interest is no longer in doubt. Interest income recognized on nonaccrual loans outstanding at December 31, 2003 and 2002, would have increased by approximately $15,000 and $18,000, respectively, had interest income been recorded under the original terms of the loan. Interest income on non-performing loans included in interest income for the year ended December 31, 2003, was approximately $8,000 and $14,000, respectively. Allowance for Loan Losses The allowance for loan losses is maintained at levels which management considers adequate to absorb losses currently in the loan portfolio at each reporting date. Management's estimation of this amount includes a review of all loans for which full collectibility is not reasonably assured and considers, among other factors, prior years' loss experience, economic conditions, distribution of portfolio loans by risk class, the estimated value of underlying collateral, and the balance of any impaired loans (generally considered to be nonperforming loans, excluding residential mortgages and other homogeneous loans). Though management believes the allowance for loan losses to be adequate, ultimate losses may vary from estimations; however, the allowance is reviewed periodically and as adjustments become necessary they are reported in earnings in the periods in which they become known. Specific allowances for impaired loans are based on comparisons of the carrying values of the loans to the present value of the loans' estimated cash flows at each loan's original effective interest rate, the fair value of the collateral, or the loans' observable market prices. The Company had $289,000 and $419,000 total loans designated as impaired at December 31, 2003 and 2002, respectively. The average investment in impaired loans for the years ended December 31, 2003 and 2002 was $794,000 and $822,000, respectively. Loan Origination Fees and Related Costs Nonrefundable fees associated with loan originations, net of direct costs associated with originating loans, are deferred and amortized over the contractual lives of the loans or the repricing period for certain loans using the level yield method. Such amortization is reflected in "Interest and fees on loans" in the accompanying Consolidated Statements of Income. Loan commitment fees are recognized in income upon expiration of the commitment period, unless the commitment results in the loan being funded. Goodwill In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 141, Business Combinations, which requires that the purchase method of accounting be used for all business combinations after June 30, 2001, and SFAS 142, Goodwill and Other Intangible Assets, which changed the accounting for goodwill from an amortization method to an impairment-only approach. Upon adoption of SFAS 142 on January 1, 2002, the Company ceased amortizing goodwill. Based on the initial goodwill impairment test completed on January 1, 2002, as required by SFAS 142, no goodwill impairment was indicated. In addition, the goodwill impairment testing completed during the years ended December 31, 2002 and 2003, indicated there was no goodwill impairment. Therefore, the Company had no changes in the carrying amount of goodwill from December 31, 2002, to December 31, 2003. Long-Lived Assets Land is stated at cost. Buildings and equipment are stated at cost less accumulated depreciation. Depreciation is provided at straight-line rates over the estimated service lives of the related property (15-50 years for buildings and improvements and 3-10 years for furniture and equipment). Expenditures for maintenance and repairs are charged to operations as incurred; expenditures for renewals and improvements are capitalized and written off through depreciation and amortization charges. Equipment retired or sold is removed from the asset and related accumulated depreciation accounts, and any profit or loss resulting therefrom is reflected in the accompanying Consolidated Statements of Income. The Company continually evaluates whether events and circumstances have occurred that indicate that such long-lived assets have been impaired. Measurement of any impairment of such long-lived assets is based on those assets' fair values and is recognized through a charge to the income statement. There were no significant impairment losses recorded during either period reported herein. Mortgage Servicing Rights The Company from time to time sells its originated loans into the secondary market. During 2002, the Company sold 7 approximately $10 million of mortgage loans to Federal National Mortgage Association ("FNMA"). For FNMA sales, mortgage servicing rights ("MSRs") are capitalized based on relative fair values of the mortgages and MSRs when the mortgages are sold and the servicing is retained. For the valuation of mortgage servicing rights, management obtains external information, evaluates overall portfolio characteristics and monitors economic conditions to arrive at appropriate prepayment speeds and other assumptions. Impairment is recognized for the amount by which MSRs exceed their fair value. The Company amortizes MSRs over the estimated lives of the underlying loans in proportion to the resultant servicing income stream. Derivatives The Bank uses derivatives to hedge interest rate exposures by mitigating the interest rate risk of mortgage loans held for sale and mortgage loans in process. The Bank regularly enters into derivative financial instruments in the form of forward contracts, as part of its normal asset/liability management strategies. The Bank's obligations under forward contracts consist of "best effort" commitments to deliver mortgage loans originated in the secondary market at a future date. Interest rate lock commitments related to loans that are originated for later sale are classified as derivatives. In the normal course of business, the Bank regularly extends these rate lock commitments to customers during the loan origination process. The fair values of the Bank's forward contracts and rate lock commitments to customers as of December 31, 2003 and 2002, were not material. Comprehensive Income Comprehensive income is the total of net income and unrealized gains and losses on securities available-for-sale, net of income taxes. Comprehensive income is displayed in the accompanying Consolidated Statements of Stockholders' Equity. There were sales and calls of securities available-for-sale during the years ended December 31, 2003 and 2002; however, the net realized gains/losses were not material. Statements of Cash Flows For purposes of presenting the Consolidated Statements of Cash Flows, the Company considers cash on hand and in banks, interest-bearing deposits in other banks and federal funds sold to be cash and cash equivalents.
2003 2002 ------- ------- SUPPLEMENTAL CASH FLOW INFORMATION: (In thousands) Cash paid during the period for- Income taxes $ 271 $ 122 Interest 4,052 4,987 Non-cash transactions- Transfers of loans receivable to real estate owned 4,552 2,932 Transfer of loans receivable to loans held-for-sale -- 9,455 Noncash compensation under stock plans 30 4 Transfer of investments from held-to-maturity to available-for sale -- 11,018 Acquisition of loans in branch purchase 5,600 -- Acquisition of deposits in branch purchase 8,300 --
Earnings Per Share Basic earnings per share (EPS) is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock are exercised or converted into common stock. A reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation is as follows: 8
Year Ended Year Ended December 31, 2003 December 31, 2002 ------------------------------------------ ------------------------------------------ Dilutive Dilutive Effect of Effect of Options Options Basic Issued Diluted Basic Issued Diluted ---------- ---------- ---------- ---------- ---------- ---------- Net income $ 403,000 -- $ 403,000 $ 201,000 -- $ 201,000 Shares available to common stockholders 2,314,055 41,164 2,355,219 2,277,916 30,985 2,308,901 ---------- ---------- ---------- ---------- ---------- ---------- Earnings Per Share $ 0.17 -- $ 0.17 $ 0.09 -- $ 0.09 ========== ========== ========== ========== ========== ==========
Options to purchase 33,094 and 66,574 shares of common stock at prices in excess of the average market price were outstanding at December 31, 2003 and 2002, respectively, but not included in the computation of diluted EPS. There were 35,145 and 43,931 shares of common stock held by the Employee Stock Ownership Plan and unallocated at December 31, 2003 and 2002, respectively. These shares are outstanding but not included in the computation of earnings per share. Stock-Based Compensation In accordance with the provisions of SFAS No. 123, Accounting for Stock-Based Compensation, the Company has elected to continue to apply APB Opinion 25 and related Interpretations in accounting for its stock option plans and, accordingly, does not recognize compensation cost for options granted at market value. If the Company had elected to recognize compensation cost for options granted during the years ended December 31, 2003 and 2002, based on the fair value of the options granted at the grant date as required by SFAS No. 123, net income and earnings per share would have been reduced to the pro forma amounts indicated below (in thousands except share amounts): 2003 2002 ----- ----- Net income - as reported $ 403 $ 201 Stock-based compensation expense, net of tax (96) (20) ----- ----- Net income - pro forma $ 307 $ 181 ===== ===== Earnings per share - as reported - basic .17 .09 Earnings per share - pro forma - basic .13 .08 Earnings per share - as reported - diluted .17 .09 Earnings per share - pro forma - diluted .13 .08 The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions: 2003 2002 ------- ------- Expected dividend yield 4.17% 5.19% Expected stock price volatility 31% 36% Risk-free interest rate 3.20% 2.65% Expected life of options 5 years 5 years Recent Accounting Pronouncements In April 2003, the Financial Accounting Standards Board ("FASB") issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. The new guidance amends SFAS No. 133 for decisions made as part of the Derivatives Implementation Group process and decisions made in connection with other FASB projects dealing with financial instruments and in connection with implementation issues raised in relation to the application of the definition of a derivative and characteristics of a derivative that contains financing components. In addition, it clarifies when a derivative contains a financing component that warrants special reporting in the statement of cash flows. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. The implementation of SFAS No. 149 was not material. 9 In December 2003, the FASB issued SFAS 132 (revised 2003), which revises employers' disclosures about pension plans and other postretirement benefits. It does not change the measurement or recognition of those plans required by SFAS 87, Employers' Accounting for Pensions, SFAS 88, Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits, and SFAS 106, Employers' Accounting for Postretirement Benefits Other Than Pensions. This Statement retains the disclosure requirements contained in SFAS 132, Employers' Disclosures about Pensions and Other Postretirement Benefits, which it replaces. It requires additional disclosures to those in the original SFAS 132 about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. This Statement is effective for financial statements ending after December 15, 2003. The effect of this Statement on the Consolidated Financial Statements is disclosed in Note 10. In May 2003, the FASB issued SFAS 150, which establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. Most of the guidance in SFAS 150 is effective for all financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company currently does not have any of the types of financial instruments defined in this SFAS and therefore the effect of this Statement on the Consolidated Financial Statements was not material. In January 2003, the FASB issued FIN 46, which clarifies the application of Accounting research Bulletin ("ARB") 51, Consolidated Financial Statements, to certain entities (called variable interest entities) in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The disclosure requirements of this Interpretation were effective for all financial statements issued after January 31, 2003. The consolidation requirements applied to all variable interest entities created after January 31, 2003. This Interpretation was amended in October 2003 by FASB Staff Position ("FSP") 46-6, Effective Date of FASB Interpretation No. 46, Consolidated of Variable Interest Entities. This FSP deferred the effective date for applying the provisions of FIN 46 for interests held by public companies in variable interest entities or potential variable interest entities created before February 1, 2003. In December 2003, FIN 46R was issued, which again deferred the effective date for interests held by public companies in special-purpose entities for periods ending after December 15, 2003, and for all other types of entities for periods ending after March 15, 2004. The effect of this Interpretation was not material. Branch Purchase During September 30, 2003, the Bank purchased all loans and assumed all deposits of a branch in Centreville, Alabama from First Federal of the South. Approximately $8.3 million in deposits were assumed at a premium of 3%, or $250,000. Total loans of approximately $5.6 were purchased and approximately $2.5 in cash was received. This transaction enabled the Bank to expand and further utilize the existing Centreville branch. 2. SECURITIES AVAILABLE-FOR-SALE AND SECURITIES HELD-TO-MATURITY: The amortized cost, approximate fair value and gross unrealized gains and losses of the Bank's securities as of December 31, 2003 and 2002, were as follows:
SECURITIES AVAILABLE-FOR-SALE ------------------------------------------------------------------------------------------------------ 2003 2002 -------------------------------------------------- ------------------------------------------------ Gross Gross Gross Gross Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair Cost Gain (Loss) Value Cost Gain (Loss) Value --------- ---------- ---------- -------- --------- ---------- ---------- -------- (In thousands) U. S. Government Agency securities $ 11,990 $ 40 $ (9) $ 12,021 $ 11,782 $ 156 $ -- $ 11,938 Corporate Bonds 15,014 821 (31) 15,804 14,306 956 -- 15,262 Obligations of states and political subdivisions 200 12 -- 212 525 19 -- 544 Mortgage-backed securities 1,330 29 (1) 1,358 1,874 50 -- 1,924 Restricted stock, at cost 1,345 -- -- 1,345 964 -- -- 964 -------- -------- -------- -------- -------- -------- -------- -------- $ 29,879 $ 902 $ (41) $ 30,740 $ 29,451 $ 1,181 $ -- $ 30,632 ======== ======== ======== ======== ======== ======== ======== ========
There were no securities held-to-maturity for the years ended December 31, 2003 and 2002. The amortized cost and estimated fair value of debt securities available-for-sale at December 31, 2003, by contractual maturity, 10 are shown below. Expected maturities will differ from contractual maturities because the issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities Available-for-Sale --------------------- Amortized Cost Fair Value --------- ---------- (In thousands) Due in one year or less $ -- $ -- Due after one year through five years 25,483 26,176 Due after five years through ten years 1,721 1,861 ------- ------- 27,204 28,037 Restricted stock 1,345 1,345 Mortgage-backed securities 1,330 1,358 ------- ------- $29,879 $30,740 ======= ======= Securities available-for-sale totaling $7,507,000 and $7,040,000 were pledged as collateral against certain public deposits at December 31, 2003 and 2002, respectively. Deposits associated with pledged securities had an aggregate balance of $6,387,000 and $6,259,000 at December 31, 2003 and 2002, respectively. Proceeds from sales of available-for-sale securities were $6.0 million in 2003 and gross gains of $299,000 were realized on those sales. There were no proceeds from available-for-sale securities in 2002. Proceeds from sales of held-to-maturity securities were $1.5 million in 2002 and gross gains of $8,000 were realized on those sales. There were no gross losses realized in 2003 or 2002. The following table shows the combined investments' gross unrealized losses and fair values, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2003.
Less than 12 Months 12 Months or More Total ------------------- ----------------- ----------------- Unrea- Unrea- Unrea- Fair lized Fair lized Fair lized Value Loss Value Loss Value Loss ------ ------ ------ ------ ------ ------ (In thousands) U.S. Government Agency securities $ 990 $ 9 $ -- $ -- $ 990 $ 9 Corporate Bonds 1,731 31 -- -- 1,731 31 Mortgage-backed securities 198 1 -- -- 198 1 ------ ------ ------ ------ ------ ------ Total $2,919 $ 41 $ -- $ -- $2,919 $ 41 ====== ====== ====== ====== ====== ======
At December 31, 2003, the Company had four individual investment positions that were in an unrealized loss position or impaired for the time frames indicated above. All of these investment positions' impairments are deemed not to be other-than- temporary impairments. The majority of the positions have experienced volatility in their market prices as a result of current market conditions, with no credit concerns related to the entities that issued the positions. The Company does not expect any other-than- temporary impairments to develop related to these investment positions. 3. LOANS RECEIVABLE: Loans receivable at December 31, 2003 and 2002, consisted of the following: 2003 2002 -------- -------- (In thousands) Mortgage loans: One-to-four family residential $ 53,468 $ 47,534 Commercial real estate 41,854 17,415 Construction 27,277 24,542 Other 101 369 Commercial loans 7,485 7,406 Consumer loans 7,563 8,171 -------- -------- 137,748 105,437 Less -- Allowance for loan losses 1,397 1,059 Net deferred loan fees 252 68 -------- -------- $136,099 $104,310 ======== ======== 11 Substantially all of the Bank's customers are located in the trade areas of Jefferson, Shelby and Bibb Counties in Alabama. Although the Bank has established underwriting standards, including a collateral policy that stipulates thresholds for loan to collateral values, the ability of its borrowers to meet their obligations is dependent upon local economic conditions. In the ordinary course of business, the Bank makes loans to officers, directors, employees and other related parties. These loans are made on substantially the same terms as those prevailing for comparable transactions with others. Such loans do not involve more than normal risk of collectibility nor do they present other unfavorable features. The amounts of such related party loans at December 31, 2003 and 2002, were $2,997,000 and $3,264,000, respectively. During the year ended December 31, 2003, new loans totaled $5,018,000, repayments were $5,226,000 and loans to parties who are no longer related totaled $59,000. An analysis of the allowance for loan losses is detailed below. For the Year Ended December 31, ------------------------------- 2003 2002 ------- ------- (In thousands) Balance, beginning of period $ 1,059 $ 775 Provision 1,141 1,956 Charge-offs (882) (1,726) Recoveries 79 54 ------- ------- Balance, end of period $ 1,397 $ 1,059 ======= ======= 4. MORTGAGE SERVICING RIGHTS: Loans serviced for others are not included in the accompanying consolidated statements of financial condition. The unpaid principal balance of mortgage loans serviced were $5,408,000 and $7,880,000 at December 31, 2003 and 2002, respectively. The loans are subserviced by a third party. The balance of capitalized servicing rights included in other assets at December 31, 2003 and 2002, was $75,000 and $102,000, respectively. The servicing rights are recorded at cost which approximates fair value. The following summarizes mortgage servicing rights. 2003 2002 ----- ----- (In thousands) Beginning balance $ 102 $ -- Mortgage servicing rights capitalized -- 153 Write downs -- (45) Amortization (27) (6) ----- ----- Ending balance $ 75 $ 102 ===== ===== 5. LAND, BUILDINGS AND EQUIPMENT: Land, buildings and equipment at December 31, 2003 and 2002, are summarized as follows: 2003 2002 ------ ------ (In thousands) Land $1,656 $1,023 Buildings and improvements 3,644 3,511 Furniture and equipment 2,314 2,120 ------ ------ 7,614 6,654 Less: Accumulated depreciation 2,706 2,389 ------ ------ $4,908 $4,265 ====== ====== 6. REAL ESTATE OWNED: Real estate owned was $4,216,000 and $1,898,000 at December 31, 2003 and 2002, respectively. Foreclosed real estate owned is carried at the lower of the recorded investment in the loan or fair value of the property, less estimated costs of disposition. Holding costs related to real estate owned are expensed as incurred. Valuations are periodically performed by management and a provision for estimated losses on real estate is charged to earnings when such losses are determined. There was no valuation allowance on real estate owned at December 31, 2003 and 2002. 12 7. GOODWILL AND OTHER INTANGIBLE ASSETS: Total goodwill at December 31, 2003 and 2002, was $983,000. The core deposit intangible asset was $233,000 at December 31, 2003, with an original cost of $250,000 and accumulated amortization of $17,000. There was no core deposit intangible at December 31, 2002. Amortization expense for 2003 was $17,000 and $0 for 2002. Estimated amortization expense related to core deposit intangible assets for the next five years is as follows: $50,000 in 2004, $50,000 in 2005, $50,000 in 2006, $50,000 in 2007, and $33,000 in 2008. 8. DEPOSITS: Deposits at December 31, 2003 and 2002, were as follows: 2003 2002 -------- -------- (In thousands) Transaction accounts $ 35,844 $ 29,552 Savings accounts 25,519 23,813 Savings certificates 89,746 86,566 -------- -------- $151,109 $139,931 ======== ======== The aggregate amount of jumbo savings certificates with a minimum denomination of $100,000 was $19,711,000 and $15,174,000 at December 31, 2003 and 2002, respectively. At December 31, 2003 and 2002, the scheduled maturities of savings certificates were as follows: 2003 2002 -------- -------- (In thousands) Within one year $ 44,115 $ 40,109 One to three years 32,642 27,642 Three to five years 12,989 18,815 -------- -------- $ 89,746 $ 86,566 ======== ======== Interest on deposits for the year ended December 31, 2003 and 2002, consisted of the following: 2003 2002 -------- -------- (In thousands) Transaction accounts $ 46 $ 76 Savings accounts 155 230 Savings certificates 2,936 3,715 -------- -------- $ 3,137 $ 4,021 ======== ======== 9. BORROWINGS: The Company has long-term Federal Home Loan Bank ("FHLB") advances of $17,000,000 at December 31, 2003 and 2002. The advances are at a fixed rate of 5.20% and have a maturity date of January 12, 2011. On January 12, 2006, the FHLB has the option to convert the whole advance to a 3-month floating London Interbank Offered Rate ("LIBOR"), at which time the Bank may terminate the advance. The Bank has a blanket lien on its one-to-four family first mortgage loans pledged as collateral to the FHLB. The Company has a $1,500,000 line of credit with an outstanding balance of $1,080,000 and $1,005,000 at December 31, 2003 and 2002, respectively. The line of credit is at LIBOR plus 2.25% and has a maturity date of May 20, 2004. The stock of FSC and the Bank are pledged as collateral. The following presents information concerning short-term borrowings with the FHLB at December 31, 2003. There were no short-term borrowings at December 31, 2002. Such short-term borrowings are issued on normal banking terms. 13 2003 ------ (In thousands) Other short-term borrowings: Balance $5,700 Daily weighted-average rate during year 1.19% Weighted-average rate at year end 1.15% 10. INCENTIVE COMPENSATION AND EMPLOYEE BENEFITS: Defined Benefit Pension Plan First Financial has a noncontributory defined benefit pension plan available to all eligible employees. The following table sets forth the Plan's funded status and amounts recognized in the Company's consolidated financial statements at, or during, the years ended December 31, 2003 and 2002: 2003 2002 ------- ------- Change in benefit obligation: (In thousands) Benefit obligation at beginning of year $ 2,250 $ 2,549 Service cost 156 203 Interest cost 118 131 Actuarial (gain) loss (75) 257 Benefits and expenses paid (242) (890) ------- ------- Benefit obligation at end of year 2,207 2,250 ------- ------- Change in plan assets: Fair value of plan assets at beginning of year 1,535 2,119 Actual gain (loss) on plan assets 252 (132) Employer contribution 342 438 Benefits and expenses paid (242) (890) ------- ------- Fair value of plan assets at end of year 1,887 1,535 ------- ------- Funded status of plan: Funded status of plan (320) (715) Unrecognized actuarial loss 723 986 Unrecognized prior service cost -- 1 Unrecognized net transition asset (1) (3) ------- ------- Net asset recognized - prepaid pension cost $ 402 $ 269 ======= ======= The accumulated benefit obligation for the defined benefit pension plan was $1.6 million and $1.3 as of December 31, 2003 and 2002, respectively. Net periodic pension cost for 2003 and 2002 includes the following components: Service cost $ 156 $ 203 Interest cost 118 131 Expected return on plan assets (80) (121) Amortization of transitional asset (2) (2) Recognized actuarial loss 17 27 Effective settlement -- 238 ----- ----- Net periodic benefit cost $ 209 $ 476 ===== ===== In fiscal 2002, in accordance with FASB No. 88, a Settlement resulted in an accelerated expense charge caused by the recognition of previously unrecognized losses which had resulted from lower interest rates and pension plan performance being less than estimated. Assumptions used to determine the net periodic pension cost for the years ended December 31, 2003 and 2002 (the measurement date), include the following: 2003 2002 ---- ---- Weighted average discount rate 6.75% 7.25% Weighted average expected return on plan assets 8.00% 9.00% Rate of annual compensation increase 4.75% 4.75% 14 Assumptions used to determine the benefit obligations at December 31, 2003 and 2002 (the measurement date), include the following: 2003 2002 ---- ---- Weighted average discount rate 6.25% 6.75% Rate of annual compensation increase 5.00% 4.75% The expected long-term rate of return for the pension plan's total assets is based on historical returns of the target allocation categories. The pension plan's long-term rate of return would meet or exceed the 8.0% expected long-term rate of return. The Company's pension plan weighted-average asset allocations and target allocations at December 31, 2003 and 2002, by asset category, are as follows: Plan Assets at December 31, ----------------- 2003 2002 ----- ----- Asset Category: Equity Securities 26% 32% Debt Securities 44% 54% Cash equivalents 30% 14% ----- ----- Total 100% 100% ===== ===== Target Allocation at December 31, -------------------- 2003 2002 ----- ----- Asset Category: Equity Securities 10-50% 10-50% Debt Securities 20-95% 20-95% Cash equivalents 10-30% 10-30% ----- ----- Total 100% 100% ===== ===== The investment strategy for the pension plan assets is to seek high current income and some capital appreciation while accepting a low to moderate level of risk. Management meets periodically to review the strategy of the plan and to review the performance of the plan assets and trustee. Generally, the Company contributes the maximum amount deductible based on current income tax laws. Employee Stock Ownership Plan The Company maintains an Employee Stock Ownership Plan ("ESOP") for eligible employees. In December 1997, the ESOP purchased 87,862 shares from treasury with the proceeds from a $950,000 note from the Company. The note is secured by the common stock owned by the ESOP. Principal payments under the note are due in equal and annual installments through December 2007; interest is payable at a rate of prime + 1%. The compensation expense related to the ESOP for the years ended December 31, 2003 and 2002, was approximately $69,000 and $62,000, respectively. Unearned compensation related to the ESOP was approximately $381,000 and $475,000 at December 31, 2003 and 2002, respectively, and is shown as a reduction of stockholders' equity in the accompanying Consolidated Statements of Financial Condition. Deferred Compensation Plan The Company maintains a Deferred Compensation Plan pursuant to which directors, officers and select employees may annually elect to defer the receipt of Board fees and up to 25% of their salary, as applicable. Associated with the Deferred Compensation Plan is a separate grantor trust to which all fee and salary deferrals may be contributed. The trust assets will be used to pay benefits to participants, but are subject to the claims of general creditors of the Company until distributed from the trust. Subject to the guidelines under the Deferred Compensation Plan, each participant may elect (i) the time and manner under which his or her Plan benefit will be paid, and (ii) the measure of the deemed investment return on his or her deferred compensation account. Such return may be based in whole or in part on either the rate of return on the Company's common stock or First Financial's highest yielding one-year certificate of deposit. A participant who elects the Company's common stock rate of return will be distributed shares of the Company's common stock when his or her plan benefit is paid. Vested benefits become payable at the election of a participant as 15 made one year prior to distribution. If a participant dies prior to collecting his or her entire vested benefit under the Deferred Compensation Plan, the value of such vested but unpaid benefit will be paid to the director's designated beneficiary or estate. The total amount deferred for the years ended December 31, 2003 and 2002, was approximately $34,000 and $34,000, respectively. In accordance with Emerging Issues Task Force No. 97-14, the Company shares owned by the trust are recorded as treasury stock and the amount owed to participants is recorded in the stockholders' equity section of the accompanying Consolidated Statements of Financial Condition. The trust owned 221,283 and 209,812 shares of the Company's common stock as of December 31, 2003 and 2002, respectively. These shares are considered in the calculation of EPS. Stock Option Plans The Company has four stockholder-approved stock option plans: the Incentive Stock Option Plan for senior officers and key employees (the "Stock Plan"), the Stock Option Plan for Outside Directors (the "Directors' Plan"), the 1995 Stock Option and Incentive Plan (the "1995 Plan") and the 2001 Stock Incentive Plan (the "2001 Plan"). All plans provide for the grant of options at an exercise price equal to the fair market value of the underlying stock on the date of grant. Options become exercisable on a basis as determined by the Stock Option Committee. In 2002, all options were exercisable at the date of grant. In 2003, 12,500 options will be exercisable in December 2004 and all other options were exercisable at the date of grant. Options under all plans expire no later than 10 years from date of grant. An analysis of stock options for the years ended December 31, 2003 and 2002, follows:
2003 2002 ---------------------- --------------------- Weighted Weighted Average Average Exercise Exercise Shares Price Shares Price -------- -------- -------- -------- Outstanding at beginning of year 168,400 $6.49 164,400 $6.47 Granted 27,000 8.27 4,000 7.25 Exercised (19,000) 5.44 -- -- Forfeited (26,390) 6.80 -- -- -------- ----- -------- ----- Outstanding at end of year 150,010 6.88 168,400 6.49 ======== ======== Exercisable at end of year 137,510 6.88 168,400 6.49 ======== ======== Weighted average fair value of options granted $ 1.66 $ 3.11 ======== ========
There were no shares and 13,000 shares in the 1995 Plan available for future grants at December 31, 2003 and 2002, respectively. The following table summarizes information about these stock options at December 31, 2003: Weighted Average Weighted Remaining Average Range of Number Outstanding Contractual Exercise Exercise Prices at December 31, 2003 Life Price --------------- -------------------- ----------- -------- $5.25 - $7.75 100,816 3.72 years $ 5.94 $8.00 - $9.13 45,620 7.61 years $ 8.52 $12.13 - $12.50 3,574 5.36 years $12.43 150,010 The 1995 Plan allows for the grant of restricted stock awards. Each director of the Company has received a restricted stock award for 2,000 shares of common stock that vests at the rate of 20% per year of service. Participants may elect to defer receipt of all or a percentage of shares. The compensation expense related to the restricted stock awards for each of the years ended December 31, 2003 and 2002, was approximately $17,000 and $42,000, respectively. At December 31, 2003 and 2002, unearned compensation related to these awards was approximately $0 and $17,000, respectively, and is shown as a reduction to stockholders' equity in the accompanying Consolidated Statements of Financial Condition. Incentive Compensation Plan The Company maintains the stockholder-approved FirstFed Bancorp, Inc. Incentive Compensation Plan whereby eligible employees and directors may receive cash bonuses in the event the Company achieves certain performance goals indicative of its profitability and stability. In addition, key employees and directors are eligible to receive "Restricted Stock" awards and stock option 16 awards. The Restricted Stock awards are considered unearned compensation at the time of award, and compensation is earned ratably over the stipulated three year vesting period. There were 3,734 and 611 shares of restricted stock awarded during the periods ended December 31, 2003 and 2002, respectively. The compensation expense related to the Restricted Stock awards for the years ended December 31, 2003 and 2002, was approximately $18,000 and $17,000, respectively. At December 31, 2003 and 2002, unearned compensation related to the Restricted Stock awards was approximately $35,000 and $24,000, respectively, and is shown as a reduction to stockholders' equity in the accompanying Consolidated Statements of Financial Condition. The stock option awards are incentive stock options for employees and non-incentive stock options for non-employee directors. Both provide for the grant of options at an exercise price equal to the fair market value of the underlying stock on the date of grant. Options granted are immediately exercisable. The Incentive Compensation Plan awards of options and restricted stock were issued from the 2001 Plan. Options expire no later than 10 years from date of grant. In 2002, all options were exercisable at the date of grant. In 2003, 55,000 options will be exercisable in December 2004 and all other options were exercisable at the date of grant. An analysis for the years ended December 31, 2003 and 2002, follows:
2003 2002 --------------------- -------------------- Weighted Weighted Average Average Exercise Exercise Shares Price Shares Price -------- -------- -------- -------- Outstanding at beginning of year 78,655 $7.49 75,600 $7.51 Granted 128,670 8.36 3,055 6.75 Exercised (6,590) 6.58 -- -- Forfeited (17,235) 6.90 -- -- -------- ----- -------- ----- Outstanding at end of year 183,500 8.13 78,655 7.49 ======== ======== Exercisable at end of year 128,500 8.13 78,655 7.49 ======== ======== Weighted average fair value of options granted $ 1.68 $ 2.89 ======== ========
The following table summarizes information about these stock options at December 31, 2003: Weighted Average Weighted Remaining Average Range of Number Outstanding Contractual Exercise Exercise Prices at December 31, 2003 Life Price --------------- -------------------- ----------- -------- $5.25 - $8.00 40,925 5.45 years $6.81 $8.12 - $11.00 142,575 9.44 years $8.51 ------- 183,500 ======= There were 97,595 and 231,017 shares in the 2001 Plan and Incentive Compensation Plan combined, which were available for future grants at December 31, 2003 and 2002, respectively. 11. INCOME TAXES: The provision (credit) for income taxes for the years ended December 31, 2003 and 2002, was as follows: 2003 2002 ----- ----- (In thousands) Current: Federal $ 140 $(339) ----- ----- State 25 (66) ----- ----- 165 (405) ----- ----- Deferred: Federal (174) 254 State (5) 50 ----- ----- (179) 304 ----- ----- Totals $ (14) $(101) ===== ===== 17 The differences between the provision for income taxes and the amount computed by applying the statutory federal income tax rate of 34% to income taxes for the years ended December 31, 2003 and 2002, were as follows: 2003 2002 ----- ----- (In thousands) Pre-tax income at statutory rates $ 132 $ 34 Add (deduct): Tax exempt income (133) (128) Employee stock ownership plan expense (14) (22) Other, net 1 15 ----- ----- Totals $ (14) $(101) ===== ===== The components of the net deferred tax asset as of December 31, 2003 and 2002, were as follows: 2003 2002 ------- ------- (In thousands) Deferred tax asset: Retirement and other benefit plans $ 393 $ 439 Allowance for loan losses 530 439 Other 38 17 ------- ------- 961 895 ------- ------- Deferred tax liability: Deferred loan fees (71) (80) FHLB stock dividend (203) (203) Unrealized gain on securities available-for-sale (302) (425) Depreciation (214) (315) Other (55) (58) ------- ------- (845) (1,081) ------- ------- Net deferred tax asset (liability) $ 116 $ (186) ======= ======= 12. COMMITMENTS AND CONTINGENCIES: Loan Commitments The Bank's policy as to collateral and assumption of credit risk for loan commitments are essentially the same as those for extensions of credit to its customers. At December 31, 2003, the Bank's loan commitments outstanding to originate and fund single- family mortgage loans, construction loans, commercial loans, home equity loans and lines of credit totaled $30.1 million to be held in the Bank's loan portfolio. These commitments expire or mature as follows: $9.2 million within 90 days, $3.9 in 91-180 days, $9.6 million in 181 days to one year, $2.6 in one to three years, and $4.8 million in five to ten years. Leases First Financial has a lease agreement for a building in which a branch office is located. Rental expense under this lease was $31,000 and $30,000 for the years ended December 31, 2003 and 2002, respectively. The lease agreement expires May 31, 2004. Future minimum lease payment under the lease in effect at December 31, 2003, is $13,000 for 2004. Employment Agreements The Company and the Bank have employment agreements with two executive officers which provide for salary continuation for the remaining term of the contract and insurance benefits for a six-month period in the event of a change in control of the Company or the death of the officer. These contracts currently expire on December 31, 2006, and the maximum aggregate liability to the Company at December 31, 2003, is approximately $1.0 million. 18 Litigation The Company and the Bank are parties to litigation and claims arising in the normal course of business. Management, after consultation with legal counsel, believes that the liabilities, if any, arising from such litigation and claims will not be material to the consolidated financial statements. 13. STOCKHOLDERS' EQUITY: Banking laws and other regulations limit the amount of dividends a bank subsidiary may pay without prior regulatory approval. At December 31, 2003, no dividend payments could be paid without such prior approval. The Company maintains a Dividend Reinvestment and Stock Purchase Plan. Under this Plan, participating stockholders may elect to reinvest dividends into additional shares of the Company's common stock. In addition, monthly optional cash payments, not less than $50 and up to $2,000 per month, may be made into the Plan by participating stockholders to purchase shares of the Company's common stock. There were 500,000 shares of common stock reserved for participants of the Plan. At December 31, 2003 and 2002, 96,325 shares and 79,304 shares, respectively, had been purchased for participants under the Plan. The costs associated with this Plan were immaterial during the years ended December 31, 2003 and 2002. 14. FAIR VALUES OF FINANCIAL INSTRUMENTS: The Company's fair values of financial instruments as presented in accordance with the requirements of SFAS No. 107 and their related carrying amounts at December 31, 2003 and 2002, are as follows:
2003 2002 ----------------------- ----------------------- Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value -------- ---------- -------- ---------- FINANCIAL ASSETS: (In thousands) Cash on hand and in banks $ 2,952 $ 2,952 $ 2,919 $ 2,919 Interest-bearing deposits in other banks 4,440 4,440 21,739 21,739 Federal funds sold 229 229 774 774 Securities available-for-sale 30,740 30,740 30,632 30,632 Loans held for sale 1,033 1,033 2,229 2,229 Loans receivable, net 136,099 137,323 104,310 106,039 Accrued interest receivable 1,095 1,095 1,342 1,342 FINANCIAL LIABILITIES: Deposits $151,109 $155,365 $139,931 $140,348 Borrowings 23,780 24,485 18,005 19,248 Accrued interest payable 217 217 232 232
In cases where quoted market prices are not available, fair values have been estimated using present value or other valuation techniques. These methods are highly sensitive to the assumptions used, such as those concerning appropriate discount rates and estimates of future cash flows. In that regard, estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current settlement of the underlying financial instruments, and they are not intended to represent a measure of the underlying value of the Company. The following methods and assumptions were used by the Company in estimating the fair values provided above: Cash on Hand and in Banks, Interest-Bearing Deposits in Other Banks, and Federal Funds Sold The carrying value of highly liquid instruments, such as cash on hand, interest-bearing deposits in financial institutions and federal funds sold, are considered to approximate their fair values. Securities Available-for-Sale and Securities Held-to-Maturity Substantially all of the Company's securities have a readily determinable fair value. Fair values for these securities are based on quoted market prices, where available. If not available, fair values are based on market prices of comparable instruments. The carrying amount of accrued interest on securities approximates fair value. 19 Loans Held for Sale All of the Company's loans held for sale are to be sold to third-party investors and have a readily determinable fair value. Loans Receivable, Net For loans with rates that are repriced in coordination with movements in market rates and with no significant change in credit risk, fair value estimates are based on carrying values. The fair values for other types of loans are estimated by discounting future cash flows using current rates at which loans with similar terms would be made to borrowers of similar credit ratings. The carrying amount of accrued interest on loans approximates fair value. Deposits The fair value of deposit liabilities with no stated maturity are disclosed as the amount payable on demand at the reporting date (i.e., at their carrying or book value). The fair values of fixed maturity deposits are estimated using a discounted cash flow calculation that applies rates currently offered for time deposits of similar remaining maturities. The economic value attributable to the long-term relationship with depositors who provide low-cost funds to the Company is considered to be a separate intangible asset and is excluded from the presentation above. The carrying amount of accrued interest on deposits approximates fair value. Borrowings The fair value of FHLB advances are estimated using a discounted cash flow calculation that applies the rate currently offered for borrowings of similar terms and remaining maturity. The carrying amount of accrued interest on FHLB advances approximates fair value. The fair value of the amount outstanding under the variable rate line of credit and accrued interest approximates their fair value. Off-Balance Sheet Instruments Off-balance sheet financial instruments include commitments to extend credit and standby letters of credit to be held in the Bank's loan portfolio. The fair value of such instruments is negligible since the arrangements are at current rates, are for short periods, and have no significant credit exposure. 15. OTHER NONINTEREST EXPENSE: The principal components of other noninterest expense for the years ended December 31, 2003 and 2002, were as follows: 2003 2002 ------ ------ (In thousands) Legal and professional $ 141 $ 191 Supplies and printing 100 95 Insurance and bonds 117 98 Advertising 87 65 Merger expense -- 185 Other expense 954 908 ------ ------ $1,399 $1,542 ====== ====== 20 16. PARENT COMPANY FINANCIAL STATEMENTS: Separate condensed financial statements of the Company as of and for the years ended December 31, 2003 and 2002, are presented below: STATEMENTS OF FINANCIAL CONDITION DECEMBER 31, 2003 AND 2002 (In thousands) 2003 2002 -------- -------- ASSETS: Interest-bearing deposits $ 140 $ 142 Investment in subsidiaries 17,361 16,790 Bank owned life insurance 1,592 1,490 Other assets 799 1,630 -------- -------- $ 19,892 $ 20,052 ======== ======== LIABILITIES: Borrowings $ 1,080 $ 1,005 Dividend payable 166 163 Other liabilities 94 76 -------- -------- 1,340 1,244 -------- -------- STOCKHOLDERS' EQUITY: Preferred stock -- -- Common stock 32 32 Paid-in-capital 8,426 8,159 Retained earnings 16,047 16,467 Deferred compensation obligation 1,969 1,876 Deferred compensation treasury stock (1,969) (1,876) Treasury stock (6,088) (6,088) Unearned compensation (416) (518) Accumulated other comprehensive income, net 551 756 -------- -------- 18,552 18,808 -------- -------- $ 19,892 $ 20,052 ======== ======== STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002 (In thousands)
2003 2002 ------- ------- Income from subsidiaries: Dividends $ -- $ 1,005 Interest 25 33 Other income 101 100 Operating expense (573) (446) ------- ------- Income (loss) before income taxes and equity in undistributed current year subsidiaries' earnings (447) 692 Income tax benefit 201 149 ------- ------- Income (loss) before equity in undistributed current year subsidiaries' earnings (246) 841 Distribution in excess of current year subsidiaries' earnings -- (640) Equity in undistributed current year subsidiaries' earnings 649 -- ------- ------- Net income $ 403 $ 201 ======= =======
21 STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002 (In thousands)
Operating Activities: 2003 2002 ------- ------- Net income $ 403 $ 201 Distribution in excess of (equity in) current year earnings of subsidiaries' (649) 640 ------- ------- (246) 841 ------- ------- Adjustments to reconcile net income to net cash provided by (used in) operating activities: Amortization of unearned compensation 132 152 Increase in cash surrender value of Bank Owned Life Insurance (102) (99) Provision for deferred compensation 116 114 Other, net 700 (1,465) ------- ------- Net cash provided by (used in) operating activities 846 (1,298) ------- ------- Financing Activities: Proceeds from exercise of stock options 146 -- Proceeds from dividend reinvestment 116 107 Dividends paid (823) (812) Purchase of treasury stock for Deferred Compensation Plan (116) (114) Proceeds from borrowings 825 1,005 Repayment of borrowings (750) -- ------- ------- Net cash provided by (used in) financing activities (602) 186 ------- ------- Increase (decrease) in cash and cash equivalents (2) (271) Cash and cash equivalents at beginning of year 142 413 ------- ------- Cash and cash equivalents at end of year $ 140 $ 142 ======= =======
17. SEGMENT DISCLOSURE: The Company considers the holding company a separate reportable segment from the banking operations since it does not offer products or services or interact with customers, but does meet the quantitative threshold as outlined in the SFAS No.131. The Company's segment disclosure is as follows for the years ended December 31, 2003 and 2002:
2003 ------------------------------------------------------- Banking Holding Total Operations Company Eliminations Company ---------- --------- ------------ --------- (In thousands) Net interest income $ 4,943 $ 25 $ -- $ 4,968 Provision for loan losses 1,141 -- -- 1,141 Noninterest income 2,238 101 -- 2,339 Noninterest expense 5,204 573 -- 5,777 --------- --------- ---------- --------- Income (loss) before income taxes 836 (447) -- 389 Income tax expense (benefit) 187 (201) -- (14) --------- --------- ---------- --------- Net income (loss) $ 649 $ (246) $ -- $ 403 ========= ========= ========== ========= Total assets $ 192,195 $ 19,892 $ (17,876) $ 194,211 ========= ========= ========== ========= Capital expenditures $ 963 $ -- $ -- $ 963 ========= ========= ========== ========= Goodwill $ 983 $ -- $ -- $ 983 ========= ========= ========== =========
22
2002 ------------------------------------------------------- Banking Holding Total Operations Company Eliminations Company ---------- --------- ------------ --------- (In thousands) Net interest income $ 5,716 $ 33 $ -- $ 5,749 Provision for loan losses 1,956 -- -- 1,956 Noninterest income 2,132 1,105 (1,005) 2,232 Noninterest expense 5,479 446 -- 5,925 --------- --------- ---------- --------- Income before income taxes 413 692 (1,005) 100 Income tax expense (benefit) 48 (149) -- (101) --------- --------- ---------- --------- Net income $ 365 $ 841 $ (1,005) $ 201 ========= ========= ========== ========= Total assets $ 175,921 $ 20,052 $ (18,403) $ 177,570 ========= ========= ========== ========= Capital expenditures $ 1,077 $ -- $ -- $ 1,077 ========= ========= ========== ========= Goodwill $ 983 $ -- $ -- $ 983 ========= ========= ========== =========
Depreciation expense is not disclosed separately by segment, since this is not considered a significant component of the profitability of a financial institution. 18. REGULATORY MATTERS: The Bank is subject to various regulatory capital requirements administered by the federal and state banking agencies. The quantitative measures to ensure capital adequacy require the Bank to maintain minimum amounts and ratios, set forth in the table below, of Total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), of Tier 1 capital (as defined) to average assets (as defined), and Tangible capital to average assets. Failure to meet minimum capital requirements can initiate certain actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Management believes, as of December 31, 2003 and 2002, that the Bank meets all capital adequacy requirements to which they are subject. As of December 31, 2003 and 2002, the most recent notification from the regulatory agencies categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum Total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the following table. There are no conditions or events since that notification that management believes have changed the institutions' category. Actual capital amounts in addition to required amounts and amounts needed to be well capitalized for Tier 1, Total, Tier 1 Leverage, and Tangible ratios for the Company and the Bank, as applicable, are as follows:
December 31, 2003 ----------------------------------------------------------------- (Dollar amounts in thousands) To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions ----------------- ------------------ ----------------- Amount Rate Amount Rate Amount Rate ------- ---- ------- ---- ------- ---- Tier 1 Risk-Based Capital Consolidated $16,820 11.5% N/A N/A N/A N/A First Financial Bank 15,509 10.8% $ 5,761 4.0% $ 8,642 6.0% Total Risk-Based Capital Consolidated $18,057 12.3% N/A N/A N/A N/A First Financial Bank 16,906 11.7% $11,523 8.0% $14,404 10.0% Tier 1 Leverage Consolidated $16,820 9.0% N/A N/A N/A N/A First Financial Bank 15,509 8.3% $ 7,506 4.0% $ 9,382 5.0%
23
December 31, 2002 ----------------------------------------------------------------- (Dollar amounts in thousands) To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions ----------------- ------------------ ----------------- Amount Rate Amount Rate Amount Rate ------- ---- ------- ---- ------- ---- Tier 1 Risk-Based Capital Consolidated $16,967 13.9% N/A N/A N/A N/A First Financial Bank 14,938 12.3% $ 4,871 4.0% $ 7,307 6.0% Total Risk-Based Capital Consolidated $18,026 14.8% N/A N/A N/A N/A First Financial Bank 15,997 13.1% $ 9,743 8.0% $12,178 10.0% Tier 1 Leverage Consolidated $16,967 9.4% N/A N/A N/A N/A First Financial Bank 14,938 8.3% $ 7,171 4.0% $10,757 5.0%
24 INDEPENDENT AUDITORS' REPORT The Board of Directors FirstFed Bancorp, Inc. We have audited the accompanying consolidated statements of financial condition of FirstFed Bancorp, Inc. and subsidiaries as of December 31, 2003 and 2002, and the related statements of income, stockholders' equity and comprehensive income, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of FirstFed Bancorp, Inc. and subsidiaries as of December 31, 2003 and 2002 and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. KPMG LLP Birmingham, Alabama January 30, 2004 25 MANAGEMENT'S DISCUSSION AND ANALYSIS The following discussion and analysis is intended to assist readers in understanding the financial condition and results of operations of FirstFed Bancorp, Inc. (the "Company") and its subsidiaries as of December 31, 2003 and 2002, and for the years ended December 31, 2003 and 2002. This review should be read in conjunction with the audited consolidated financial statements, accompanying footnotes and supplemental financial data included herein. FINANCIAL HIGHLIGHTS The Company's net income for 2003 totaled $403,000, or $.17 per share on a diluted basis. This is an 88.9% increase over the $.09 per share, or $201,000, earned for 2002. The Company's financial condition and earning performance for 2003 were influenced by the acquisition of $8.3 million in deposits and $5.6 million in loans during the third quarter of 2003, and other factors, the key components of which are summarized below. o Total loans increased by $31.8 million, or 30.5%, and total deposits increased by $11.2 million, or 8.0%. A portion of these increases were attributed to the acquisition of deposits and loans discussed herein. o Net interest income after provision for loan losses increased modestly, despite a decrease of $781,000, or 13.6%, in net interest income due primarily to a reduction in interest rate spread as prevailing rates continued at historically low levels. o The provision for loan losses declined $815,000, or 41.7%. The total nonperforming loans decreased to $289,000, or 0.2% of loans receivable at December 31, 2003 compared to $419,000, or 0.4% of loans receivable at December 31, 2002. o Noninterest income increased $107,000, or 4.8%, primarily due to increased deposit-related fee income and to gains on sales of investments. o Noninterest expense decreased $148,000, or 2.5%, primarily due to a nonrecurring pension expense of $238,000 in 2002. GENERAL AND CRITICAL ACCOUNTING POLICIES Organization and Basis of Presentation The Company is the holding company and sole shareholder of First State Corporation ("FSC"). FSC is the sole shareholder of First Financial Bank (the "Bank"). There are no material assets in FSC except for the investment in the Bank. The accompanying consolidated financial statements include the accounts of the Company, the Bank and FSC. During 2002, First Federal, a subsidiary of the Company, and First State, a subsidiary of FSC, were merged and the name changed to First Financial Bank. All significant intercompany balances and transactions have been eliminated in consolidation. Allowance for Loan Losses The Company's allowance for loan losses is determined quarterly in accordance with Statement of Financial Accounting Standards ("SFAS") 5, Accounting for Contingencies, and SFAS 114, Accounting by Creditors for Impairment of a Loan, as amended. The allowance is reflected in the Consolidated Statements of Financial Condition as a contra-account to loans thereby stating loans at an estimated realizable value. The allowance is recorded by the provision for loan losses in the Consolidated Statements of Income when losses are estimated to have occurred. The loan losses are than charged against the allowance when the loan is determined uncollectible. Any recoveries are credited to the allowance. The allowance for loan losses is maintained at levels which management considers adequate to absorb losses currently in the loan portfolio at each reporting date. Management's estimation of this amount includes a review of all loans for which full collectibility is not reasonably assured and considers, among other factors, prior years' loss experience, economic conditions, distribution of portfolio loans by risk class, the estimated value of underlying collateral, and the balance of any impaired loans. Though management believes the allowance for loan losses to be adequate, ultimate losses may vary from estimations; however, the allowance is reviewed periodically and as adjustments become necessary they are reported in earnings in the periods in which they become known. Each quarter a Watch List Report is prepared. Watch List loans are comprised of non-performing loans and other loans that have been graded by internal loan review as a Watch List loan. These loans are specifically reviewed for impairment and an allowance established as needed. Specific allowances for impaired loans are based on comparisons of the carrying values of the loans to the present value of the loans' estimated cash flows at each loan's original effective interest rate, the fair value of the collateral, or the loans' observable market prices. All remaining loans are considered non-watch list loans. The allowance needed for non-watch list 26 loans is determined by applying a loss factor based on the most recent twelve quarter average loss experience by loan portfolio type. The calculation of allowance methodology and assumptions used are continually reviewed and adjusted accordingly if factors change. Liquidity Liquidity refers to the ability of the Company to meet its cash flow requirements in the normal course of business, including loan commitments, deposit withdrawals, liability maturities and ensuring that the Company is in a position to take advantage of investment opportunities in a timely and cost-efficient manner. Management monitors the Company's liquidity position and reports to the Board of Directors monthly. The Company may achieve its desired liquidity objectives through management of assets and liabilities and through funds provided by operations. Funds invested in short-term marketable instruments, the continuous maturing of other interest-earning assets, the possible sale of available-for-sale securities and the ability to securitize certain types of loans provide sources of liquidity from an asset perspective. The liability base provides sources of liquidity through deposits. Traditionally, the Bank's principal sources of funds have been deposits, principal and interest payments on loans and proceeds from interest on investments and maturities of investments. If needed, sources of additional liquidity include borrowing abilities from the FHLB-Atlanta and correspondent banks. See Note 13 of the Notes to Consolidated Financial Statements regarding capital resources. Pending Accounting Pronouncements In October 2003, the American Institute of Certified Public Accountants ("AICPA") issued SOP 03-3, which addresses accounting for differences between contractual cash flows expected to be collected from an investor's initial investment in loans or debt securities (loans) acquired in a transfer if those differences are attributable, at least in part, to credit quality. It includes such loans acquired in purchase business combinations and applies to all nongovernmental entities, including not-for-profit organizations. This SOP does not apply to loans originated by the entity. This SOP limits the yield that may be accreted (accretable yield) to the excess of the investor's estimate of undiscounted expected principal, interest, and other cash flows (cash flows expected at acquisition to be collected) over the investor's initial investment in the loan. This SOP requires that the excess of contractual cash flows over cash flows expected to be collected (nonaccretable difference) not be recognized as an adjustment of yield, loss accrual, or valuation allowance. This SOP prohibits investors form displaying accretable yield and nonacretable difference in the balance sheet. Subsequent increases in cash flows expected to be collected generally would be recognized prospectively through adjustment of the loan's yield over its remaining life. Decreases in cash flows expected to be collected would be recognized as impairment. This SOP prohibits "carrying over" or creation of valuation allowances in the initial accounting of all loans acquired in a transfer that are within the scope of this SOP. The prohibition of the valuation allowance carryover applies to the purchase of an individual loan, a pool of loans, a group of loans, and loans acquired in a purchase business combination. This SOP is effective for loans acquired in fiscal years beginning after December 15, 2004. There is no impact to the Consolidated Financial Statements until a business combination is completed. COMPARISON OF FINANCIAL CONDITION AS OF DECEMBER 31, 2003 AND 2002, AND RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002 Changes in Financial Condition During the third quarter ended September 30, 2003, the Bank acquired deposits and loans from a branch in Centreville, Alabama, from First Federal of the South. Approximately $8.3 million in deposits were assumed at a premium of 3%, or $250,000. Total loans of approximately $5.6 million were purchased and approximately $2.5 million in cash was received. The purchased branch was merged into the Bank's existing Centreville branch enabling the Bank to maximize utilization of the existing Centreville branch. Cash and cash equivalents decreased $17.8 million, or 70.1%, to $7.6 million at December 31, 2003, compared to $25.4 million at December 31, 2002. The decrease in cash and cash equivalents was primarily the result of an increase in portfolio loan originations. Securities available-for-sale and held-to-maturity increased slightly to $30.7 million at December 31, 2003. The increase was the result of securities purchases of $13.6 million, offset by maturities and calls totaling $7.3 million and sales of $6.0 million. There was a slight decrease in fair value. Loans receivable, net, at December 31, 2003, were $136.1 million, an increase of $31.8 million, or 30.5%, from $104.3 million at December 31, 2002. The increase in loans receivable, net, was substantially due to the increased portfolio originations in connection with a new treasury-based, adjustable-rate commercial mortgage program. The increase is also attributable to $5.6 million in loans acquired in connection with the branch purchase discussed above. The Company's consolidated allowance for loan losses increased to $1.4 million at December 31, 2003, from $1.1 million at December 31, 2002. This increase of $300,000 was primarily due to a provision of $1.1 million, less charge-offs over recoveries of 27 $800,000, to maintain the allowance at a level believed appropriate to cover losses inherent in the portfolio. Nonperforming loans, which represents nonaccruing loans, at December 31, 2003, decreased to $289,000, or 0.2% of loans receivable, from $419,000, or 0.4% of loans receivable at December 31, 2002. Land, building, and equipment, net, increased $643,000, or 15.1%, to $4.9 million at December 31, 2003. The increase is primarily the result of construction in process on a new and expanded Pelham branch location. The new building is needed as a result of growth at that location. The current Pelham facility is under lease which expires in May 2004. Real estate owned was $4.2 million at December 31, 2003, an increase of $2.3 million from December 31, 2002, as a result of foreclosures, net of dispositions. The increase is primarily the result of three commercial foreclosures of one borrower, totaling approximately $2.5 million, during the fourth quarter of 2003. Real estate owned is recorded at the lower of cost or the fair value less estimated cost to dispose. The Company owns Bank Owned Life Insurance ("BOLI") on certain key officers. The life insurance policies can be used to provide funding for liabilities associated with certain existing employee benefits. Income earned on the policies will offset, to some extent, benefit expenses. Increases in the cash surrender value of the policies are recorded as a component of noninterest income. Total deposits increased $11.2 million to $151.1 million at December 31, 2003, compared to $139.9 million at December 31, 2002. This increase was substantially the result of the purchase of a branch in Centreville, Alabama, with total deposits of $8.3. The remaining growth was primarily in the Bank's deposit transaction accounts. Borrowings increased $5.8 million to $23.8 million at December 31, 2003. The increase was substantially the result of overnight borrowings to fund loan demand. Stockholders' equity decreased $256,000 to $18.6 million at December 31, 2003. The net decrease in equity during the year ended December 31, 2003, was primarily attributable to dividends declared of $800,000, or $.35 per share, partially offset by earnings of $403,000 and stock totaling $262,000 issued under the Dividend Reinvestment Plan and upon the exercise of stock options. General Results of Operations Net income for the year ended December 31, 2003, was $403,000, an increase of $202,000 from the prior year's amount of $201,000. The increase was substantially the result of a decrease in the provision for loan losses, offset by a decrease in net interest income primarily related to a decrease in the interest rate spread. Interest Income Total interest income decreased to $9.0 million for the year ended December 31, 2003, from $10.7 million for the year ended December 31, 2002. This decrease was primarily the result of a decrease in the average yield on interest earning assets to 5.3% during the year ended December 31, 2003, from 6.4% for the year ended December 31, 2002. Interest on loans decreased $956,000 to $7.5 million for the year ended December 31, 2003, from $8.4 million for the year ended December 31, 2002. There was a decrease in the average yield on loans to 6.1% for the year ended December 31, 2003, from 7.9% for the year ended December 31, 2002. The average balance of loans between years increased as a result of portfolio originations. Interest earned on securities decreased $543,000 to $1.4 million for the year ended December 31, 2003, from $1.9 million for the year ended December 31, 2002. The decrease was primarily the result of a reduction in the average yield on investments to 4.9% for the year ended December 31, 2003, compared to 5.8% for the year ended December 31, 2002 plus a decrease in the average balance on investments. Interest on federal funds sold and interest-bearing deposits decreased $161,000 to $159,000 for the year ended December 31, 2003, from $320,000 for the year ended December 2002. This decrease was primarily attributable to a decrease in average yield to 0.8% for the year ended December 31, 2003, from 1.2% for the year ended December 31, 2002, in addition to a decrease in the average balance of federal funds sold and interest-bearing deposits. The Company has decreased the high amount of cash and cash equivalents during 2003 through increased loan originations. Interest Expense Total interest expense for the year ended December 31, 2003, was $4.0 million compared to $4.9 million for the year ended December 31, 2002. Interest expense on deposits for the year ended December 31, 2003, was $3.1 million compared to $4.0 million for the year ended December 31, 2002. This decrease was primarily the result of a decrease in the average rate paid on deposits to 2.1%, from 2.8% for the year ended December 31, 2002. The average balance of deposits increased between fiscal 2003 and fiscal 2002. Interest expense on borrowings increased as a result of the interest on a line of credit which had an average balance outstanding during fiscal 2003 of $1.0 million, compared to $500,000 in fiscal 2002. Net Interest Income Net interest income for the year ended December 31, 2003, decreased approximately $800,000, to $5.0 million from $5.8 million 28 for the previous year. This decrease was primarily the result of a decrease in the net interest spread to 2.9% from 3.3% in the prior period. Provision for Loan Losses The provision for loan losses is a function of the evaluation of the allowance for loan losses. Management increased the Company's total allowance for loan loss by a provision of $1.1 million during the year ended December 31, 2003 compared to $2.0 million during the year ended December 31, 2002. The Company's allowance for loan losses is based on management's evaluation of losses inherent in the loan portfolio and considers, among other factors, prior years' loss experience, economic conditions, distribution of portfolio loans by risk class and the estimated value of underlying collateral. The Bank segregates its loan portfolio into problem and non-problem loans. The Bank then determines the allowance for loan losses based on specific review of all problem loans by internal loan review committees. This detailed analysis primarily determines the allowance on problem loans by specific evaluation of collateral fair value. The allowance for non-problem loans considers historical losses and other relevant factors. The allowances are reviewed throughout the year to consider changes in the loan portfolio and classification of loans which results in a self-correcting mechanism. During 2002, the Company's primary financial institution, a federal savings bank, was merged with and into a subsidiary with a commercial state bank charter. In connection with the merger, the State Superintendent required that First Financial change certain methodologies previously used to evaluate loan losses, which resulted in additional loan loss provisions in order to maintain the allowance at a level believed appropriate to absorb losses inherent in the portfolio. Also, loan charge-offs were recorded which resulted in additional loan loss provisions. The Company continually evaluates its credit risk and makes provisions for loan losses as deemed appropriate in the period incurred. Noninterest Income Noninterest income for the year ended December 31, 2003, totaled $2.3 million as compared to $2.2 million for the year ended December 31, 2002. The increase was primarily the result of increases in fee income and fees from loans sold in the secondary market. There was also a slight increase in income due to increases in cash surrender value changes on BOLI. Noninterest Expense Noninterest expense for the year ended December 31, 2003, totaled $5.8 million, compared to $5.9 million for the year ended December 31, 2002. Salaries and employee benefits increased $169,000 for the year ended December 31, 2003, when compared to the prior year. The increase was substantially the result of an increase in incentive pay when compared to the prior year. During 2002, the Company recorded a nonrecurring pension expense of $238,000, related to the payment of a pension obligation. In accordance with FASB No. 88, a Settlement resulted in an accelerated expense charge caused by the extremely low interest rates and pension plan performance being less than estimated. Office building and equipment expense for the year ended December 31, 2003, increased slightly when compared to the prior year primarily as the result of the addition of the new Hueytown location. Data processing expense for the year ended December 31, 2003, decreased slightly when compared to the prior year, substantially as a result of efficiencies in data processing resulting from the merger of the subsidiary financial institutions. The decrease in other operating expenses resulted from merger-related expenses of approximately $185,000 recorded in fiscal 2002. Income Taxes Federal and state income tax benefits decreased $87,000, to a credit of $14,000 in the year ended December 31, 2003, from a credit of $101,000 for the year ended December 31, 2002. The decrease in the credit was primarily the result of the increased taxable net income for the year ended December 31, 2003, as compared to the year ended December 31, 2002. The net income before tax for the year ended December 31, 2003, was $389,000, but the taxable net income was reduced by BOLI tax-free income of $368,000 and other items, which resulted in the recording of a tax credit. Change in Independent Public Accountants On June 18, 2002, the Company determined not to renew the engagement of its independent public accountants, Arthur Andersen LLP ("Andersen") and appointed KPMG LLP ("KPMG") as its new independent public accountants, effective immediately. This determination followed the Company's decision to seek proposals from independent accountants to audit the Company's financial statements for the fiscal year ended December 31, 2002. The decision not to renew the engagement of Andersen and to retain KPMG, subject to KPMG's acceptance process, was approved by the Company's Board of Directors upon the recommendation of its Audit Committee. Andersen's report on the Company's 2001 financial statements was issued in March 2002, in conjunction with the filing of the Company's Annual Report on Form 10-KSB for the year ended December 31, 2001. 29 During the Company's two most recent fiscal years ended December 31, 2001, and the subsequent interim period through June 18, 2002, there were no disagreements between the Company and Andersen on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedures, which disagreements, if not resolved to Andersen's satisfaction, would have caused Andersen to make reference to the subject matter of the disagreement(s) in connection with its reports. The audit reports of Andersen on the consolidated financial statements of the Company and subsidiaries as of and for the fiscal years ended December 31, 2001 and 2000 did not contain any adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope, or accounting disclosures. During the Company's two most recent fiscal years ended December 31, 2001, and the subsequent interim period through June 18, 2002, the Company did not consult with KPMG regarding any of the matters or events. Forward-Looking Statements This report, including Management's Discussion and Analysis, includes certain forward-looking statements addressing, among other things, the Company's prospects for earnings, asset growth and net interest margin. Forward-looking statements are accompanied by, and identified with, such terms as "anticipates," "believes," "expects," "intends," and similar phrases. Management's expectations for the Company's future necessarily involve a number of assumptions and estimates. Factors that could cause actual results to differ from the expectations expressed herein are: substantial changes in interest rates, changes in the general economy, and changes in the Company's strategies for credit-risk management, interest-rate risk management and investment activities. Accordingly, any forward-looking statements included herein do not purport to be predictions of future events or circumstances and may not be realized. 30 BOARDS OF DIRECTORS FirstFed Bancorp, Inc. and First Financial Bank B. K. Goodwin, III Chairman of the Board, Chief Executive Officer and President Fred T. Blair Retired, First Federal Savings Bank James B. Koikos Owner, Bright Star Restaurant E. H. Moore, Jr. President and Owner, Buddy Moore Trucking, Inc. James E. Mulkin President, Mulkin Enterprises G. Larry Russell Certified Public Accountant Directors Emeritus A. W. Kuhn Retired, Bessemer Housing Authority Malcolm E. Lewis Retired, Polar Storage Locker Plant Advisory Board of Bibb County William Elbert Belcher, III Owner, Belcher Forest Products, Inc. R. Hugh Edmonds Owner, Hugh Edmonds Realty Milton R. Fulgham Retired, First State Bank Randall J. Gilmore Real Estate Development Albert L. Green Retired, N.D. Cass, Co. Joe E. Weeks Owner, J & J Metal and Salvage and Tannehill General 31 OFFICERS Executive Officers of FirstFed Bancorp, Inc. and First Financial Bank B. K. Goodwin, III Chairman of the Board, Chief Executive Officer and President Lynn J. Joyce Chief Financial Officer, Executive Vice President, Secretary and Treasurer Jeff V. Williams Senior Vice President Officers of First Financial Bank W. Paul Province Compliance and Audit Officer Brenda M. Baswell Vice President of Operations Cathy N. Ackerman Assistant Vice President and Branch Manager W. Max Adams Assistant Vice President and Branch Manager Chris Alvis Assistant Vice President and Loan Officer John F. Ammons Assistant Vice President and Branch Manager Pamela Gamble Assistant Vice President and Branch Manager Miranda Leach Assistant Vice President and Branch Manager Robert Nelson, III Assistant Vice President and Loan Officer Neil Walker Assistant Vice President and Branch Manager Charlotte White Assistant Vice President and Branch Manager J. Alton Yeager Assistant Vice President Linda Parish Collections Officer 32 COMPANY DATA ANNUAL MEETING FirstFed Bancorp, Inc.'s Annual Meeting of Stockholders will be held at the Bright Star Restaurant, 304 19th Street North, Bessemer, Alabama, 35020 on Tuesday, April 27, 2004, at 4:30 P.M. REGISTRAR AND TRANSFER AGENT Registrar and Transfer Company 10 Commerce Drive Cranford, New Jersey 07016-3572 INDEPENDENT PUBLIC ACCOUNTANTS KPMG LLP Birmingham, Alabama ANNUAL REPORT ON FORM 10-KSB The December 31, 2003, Annual Report on Form 10-KSB filed with the Securities and Exchange Commission is available on or after April 1, 2004, upon written request to all stockholders of record free of charge from the following: Lynn J. Joyce, Secretary FirstFed Bancorp, Inc. 1630 4th Avenue North Post Office Box 340 Bessemer, AL 35021-9988 OFFICE LOCATIONS Main Office (Bessemer): 1630 4th Avenue North 35020, (205) 428-8472 Centreville Office: 125 Birmingham Road 35042, (205) 926-4651 Hoover Office: 1604 Montgomery Highway 35216, (205) 822-8534 Hueytown Office: 1243 Hueytown Road 35023, (205) 497-4100 Pelham Office: 56 Pelham Plaza Shopping Center 35124, (205) 664-1824 Vance Office: 18704 Highway 11 North 35490, (205) 633-0904 West Blocton Office: Main Street 35184, (205) 938-7881 Woodstock Office: Highway 5 35188, (205) 938-7813 WEB PAGE ADDRESS www.firstfedbessemer.com EX-14 4 ex14.txt EXHIBIT 14 FIRSTFED BANCORP, INC. CODE OF ETHICS This Code of Ethics of FirstFed Bancorp, Inc. (the "Company") sets forth principles for maintaining high ethical standards. It is the obligation of all directors, officers and other employees to understand and adhere to this Code of Ethics and the Company's other policies and procedures, and to consider how their actions may be interpreted by others. Failure to abide by these standards can be grounds for disciplinary action up to and including dismissal. Principles The Board of Directors endorses the following principles, as a matter of the Company's corporate policy: o Applicable laws, regulations, policies and procedures shall be complied with. o Directors, officers and other employees shall be honest and fair in all of their actions and relationships, and shall appropriately document all material actions. o Books and records shall be accurate, and in accordance with acceptable accounting practices. o Directors, officers and other employees shall scrupulously avoid any action or interest that conflicts, or may appear to conflict, with the interests of the Company or its customers. o Directors, officers and other employees shall maintain the confidentiality of information pertaining to customers, suppliers, employees or the Company itself, except when disclosure is required by law, regulation or legal proceeding. Conflicts of Interest Conflicts of interest, or potential conflicts of interest, must be identified and addressed. A "conflict of interest" will arise whenever personal interests interfere or conflict (or appear to interfere or conflict) with the Company's interests. Conflicts of interest may not always be apparent, and officers and other employees should consult with senior management who will determine if particular situations are acceptable. Confidentiality The Company shall protect the confidentiality and integrity of data and information entrusted to it by customers, shareholders and employees. Directors, officers and other employees must maintain the confidentiality of this information even after leaving the Company. Directors, officers and other employees must also prevent misuse of confidential information. Confidential information includes all non-public information that, if publicly disclosed, might benefit the Company's competition or harm the Company, or its customers, shareholders or employees. SEC and Other Reporting As a public company, the Company's filings with the Securities and Exchange Commission and other regulatory agencies must be accurate and timely. Financial Statements and Other Records The Company's books, records, accounts and financial statements must be maintained in reasonable detail, must appropriately reflect the Company's transactions and must conform both to applicable legal requirements and to the Company's system of internal controls. Unrecorded or "off the books" funds or assets should not be maintained unless permitted by applicable law or regulation. Records should always be retained or destroyed according to the Company's record retention policies. Fair Dealing All dealings with customers, prospects, suppliers, competitors, and employees must be conducted in accordance with applicable laws and regulations and on terms that are fair and in the best interests of the Company. No director, officer or other employee should take unfair advantage through manipulation, concealment, abuse of privileged information, misrepresentation or other unfair dealings. Applicable laws and regulations pertaining to anti-money laundering, record keeping, antitrust, fair competition, anti-racketeering, and anti-bribery laws shall be complied with. Directors, officers and other employees shall deal with current and prospective customers, prospects, suppliers, and employees without any discrimination because of race, color, creed, religion, sex, national origin, ancestry, citizenship status, age, marital status, sexual orientation, physical or mental disability, veteran status, liability for service in the Armed Forces of the United States, or any other classification prohibited by applicable laws and regulations. The Company shall maintain an environment free of harassment, discrimination, or intimidation. Compliance with the Laws, Regulations, Policies and Procedures All directors, officers and other employees are expected to understand and comply with all laws, regulations, policies and procedures that apply to them in their respective positions with the Company. Directors, officers and other employees shall not participate in any illegal or criminal activity. Any employee who has been convicted of or pleaded guilty to a felony or who has been sanctioned by a regulatory agency must immediately report such information in writing to senior management. Directors, officers and other employees shall also respond to specific inquiries of the Company's independent public accounting firm. Every possible situation cannot be anticipated. If a director, officer or other employee is uncertain about any aspect of this Code of Ethics and how it should be applied or interpreted, he or she is encouraged to discuss it with senior management. Non-Retaliation The Company prohibits retaliation of any kind against any individual who has made a good faith reports or complaints of an observed or suspected of this Code or other known or suspected illegal or unethical conduct. All directors, officers and other employees in supervisory, managerial, or other sensitive positions are required annually to certify that they have read, understand, and comply with the Code of Ethics. The Code of Ethics shall be revised periodically to ensure that it addresses new statutes and contemporary legal issues, as appropriate. EX-21 5 ex21.txt EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT State of Percentage Subsidiary Incorporation Ownership ---------- ------------- --------- First State Corp. Alabama 100% Subsidiary of First State Corp.: First Financial Bank Alabama 100% EX-23 6 ex23.txt EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT The Board of Directors FirstFed Bancorp, Inc. We consent to the incorporation by reference in the registration statements (Nos. 333-40559 on Form S-3 and 33-51662, 33-58260, 33-81798, 333-09065, 333-61165 and 333-62018 on Form S-8) of FirstFed Bancorp, Inc. of our report dated January 30, 2004 with respect to the consolidated statement of financial condition of FirstFed Bancorp, Inc. as of December 31, 2003 and 2002 and the related consolidated statements of income, stockholders' equity and comprehensive income, and cash flows for the years then ended, which report appears in the December 31, 2003, annual report on Form 10-KSB of FirstFed Bancorp, Inc. /s/ KPMG LLP - ------------------------------- KPMG LLP Birmingham, Alabama March 24, 2003 EX-31.1 7 ex31-1.txt Exhibit 31.1 CERTIFICATIONS I, B. K. Goodwin, III, certify that: 1. I have reviewed this annual report on Form 10-KSB of FirstFed Bancorp, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; 4. The small business issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. The small business issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. Date: March 26, 2004 By: \s\ B. K. Goodwin, III ---------------------------------------- Chairman of the Board, Chief Executive Officer and President CERTIFICATIONS I, Lynn J. Joyce, certify that: 1. I have reviewed this annual report on Form 10-KSB of FirstFed Bancorp, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; 4. The small business issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. The small business issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. Date: March 26, 2004 By: \s\ Lynn J. Joyce ---------------------------------------- Chief Financial Officer, Executive Vice President, Secretary and Treasurer EX-32.1 8 ex32-1.txt EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report on Form 10-KSB for the period ended December 31, 2003 (the "Report") of FirstFed Bancorp, Inc. (the "Company"), as filed with the Securities and Exchange Commission on the date hereof, the undersigned, Chief Executive Officer and Chief Financial Officer of the Company, hereby each certify that to the best of our knowledge: (1) the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the periods covered in the Report. \s\ B. K. Goodwin, III March 26, 2004 - ------------------------------------------- ----------------------- B. K. Goodwin, III, Chief Executive Officer Date \s\ Lynn J. Joyce March 26, 2004 - ------------------------------------------- ----------------------- Lynn J. Joyce, Chief Financial Officer Date A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. The information furnished herein shall not be deemed to be filed for purposes of Section 18 of the Securities Exchange Act of 1934, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933. -----END PRIVACY-ENHANCED MESSAGE-----